Case Study – Mary

Mary, 63, recently widowed, was reviewing with the family’s lawyer the options available under her late husband’s Self Invested Personal Pension (SIPP)

The Question

Mary, 63, recently widowed, was reviewing with the family’s lawyer the options available under her late husband’s Self  Invested Personal Pension (SIPP). “I’m thinking of waiving my entitlement to the lump sum in favour of my children. What do you think?”

Mary’s lawyer referred the question to us, confirming that Mary’s late husband had only settled half of his SIPP at retirement to provide income drawdown. The SIPP provider had written to Mary with her options, which included continuing to receive an income from the fund, using the fund to buy a widow’s annuity or receiving a lump sum.

Following our analysis, we were able to explain the potential value of each of the options within the context of Mary’s new financial circumstances. The focus on pensions planning helped Mary to reflect on the far more important question of how she would manage the rest of her wealth.

The Real Issue

What started as a pension discussion quickly turned to Mary’s needs and her grown children. “I want to help my daughters but how can I be sure that I don’t run out of money during my lifetime?”

Mary’s eldest daughter was planning to educate her two children privately, with her youngest daughter in the process of buying a new home. Mary had inherited from her husband an investment portfolio which was predominantly invested in equities. Mary was also a beneficiary of various trusts established by her late parents.

While Mary felt relatively secure in the short-term, she was not sure how much money she would need if she became ill or needed around-the-clock nursing care. As we discussed Mary’s situation, Mary became less concerned about the detail of her late husband’s SIPP – annuity purchase, critical yields, investment strategy, lump sums – and more concerned about protecting her long-term financial position  and then her children’s.

Our Approach

We ran multiple personal cash flow scenarios, changing assumptions (economic and personal). We looked at strategies that could help reduce the risks of Mary running out of money – while making financial dispositions to the children.

We provided various solutions. These included using her late husband’s pension funds to buy a fixed income for life, waiving her entitlement to the funds in favour of the children and lowering her exposure to equity risk. We scenario-tested each of these strategies under different market and personal conditions. The different scenarios allowed Mary to see the possible outcomes of different alternatives and make a more informed decision.

Based on our recommendation, Mary decided to waive a proportion of her entitlement under her husband’s SIPP, with this being gifted to her children. The money was put aside by her eldest daughter to help fund her children’s education and by her youngest to help fund her move on to the housing ladder. The remaining proportion of the fund was used to buy an annuity for Mary. We also lowered the risk profile of the investment portfolio by reducing the exposure to equities and increasing the proportion of fixed income.

Outcome

Mary felt confident in the solution but, equally important, felt confident that that she had asked the right questions, examined each scenario and was solving the real issues. She was reassured that her long-term needs had been secured and that she was able to help her children without prejudicing her own position. In addition, she felt more comfortable about the investment portfolio which now better reflected her attitude to risk and long-term needs.