Pension Consolidation Case Study: How a Pension Review Identified £100,000 of Potential Tax Savings

The client's starting position

The client had accumulated pensions with several different providers during his working life. He knew about four of them, but as part of our review we were also able to trace two additional pensions from previous employers.

Having six separate pension arrangements can make it difficult to see the bigger picture. Different providers may have different charges, investment options and withdrawal processes, while important information can become spread across several sets of paperwork.

The first stage of our pension consolidation process was therefore to establish exactly what the client held and how each pension worked.

This gave us a much clearer picture of the total pension value, the charges being paid and the options available to the client.

If you have accumulated pensions from previous employers, our Pensions and Retirement Planning service can help you review what you currently hold and whether your existing arrangements remain suitable.

The pension withdrawal problem

The client wanted to access some of his pension as tax free cash to help fund improvements to his home.

At first glance, this might sound relatively straightforward. However, the way his existing pension providers allowed him to access the money created a significant problem.

If he had taken the money using the withdrawal options available through the existing arrangements, he would have needed to withdraw the pension in a way that created a substantial Income Tax liability. Based on the circumstances of the case, this could have resulted in the client losing almost half of the pension value to tax.

That was clearly something that needed to be investigated before any withdrawal was made.

How pension consolidation changed the options

After reviewing the existing arrangements, we recommended consolidating suitable pensions into a more appropriate arrangement.

Pension consolidation does not mean automatically transferring every pension into one plan. Existing benefits, guarantees, charges and other features need to be considered before any transfer takes place.

In this case, bringing the suitable pensions together provided greater flexibility around how the client could access his money.

It meant we could help structure the withdrawal more efficiently rather than simply accepting the withdrawal options offered by his previous providers.

Most importantly, this avoided the significant tax consequence that could otherwise have arisen. The review identified a potential £100,000 saving in Income Tax compared with the alternative approach available through the existing pension arrangements.

That figure alone demonstrated why carrying out a full pension consolidation review before taking money from a pension can be so important.

Pension consolidation also uncovered an Inheritance Tax issue

The review identified another issue that the client had not previously considered.

The value of his pension and other assets meant that Inheritance Tax could become relevant to his estate. This was particularly important because the rules around pensions and Inheritance Tax are changing.

For the client, this meant that simply leaving a large pension untouched could have significant implications for the amount ultimately passed to beneficiaries.

The client was particularly concerned to discover that his pension could create an additional tax liability on death. It prompted a wider conversation about how his pension should be used alongside the rest of his financial plan.

Building a clearer retirement plan

The purpose of the pension consolidation was therefore much broader than simply moving pensions into one arrangement.

Once the pensions had been reviewed and suitable arrangements identified, we could look at what retirement actually needed to look like for the client.

How much income would he need? When did he want to retire? How much could he afford to withdraw? How should the pension be invested? And how should his pension be considered alongside his other assets?

Answering these questions gave the client a much clearer picture of his retirement position and greater confidence about the decisions he was making.

This is one of the key benefits of pension consolidation when it is carried out as part of a wider financial review. Rather than having several pension providers working independently, the client could start looking at his retirement finances as one overall plan.

You can find out more about how we approach Pensions and Retirement Planning at Castle Stonebridge.

The outcome for the client

The pension consolidation delivered several practical benefits.

The pension arrangements were simplified. Six separate pensions were reviewed and suitable arrangements were consolidated, making the client's retirement planning easier to understand and manage.

The pension withdrawal could be structured more efficiently. Rather than accepting the restrictive withdrawal options offered by the existing providers, the client had access to a more suitable arrangement for taking the money he wanted.

A potential £100,000 Income Tax saving was identified. The alternative withdrawal route could have resulted in a significant tax bill, whereas the recommended approach allowed the withdrawal to be structured much more efficiently.

Ongoing pension charges were reduced. As part of the review, the existing charges were assessed and consolidation provided an opportunity to reduce the total annual cost of the pension arrangements.

The wider estate planning position became clearer. The client became aware of the potential Inheritance Tax implications of retaining significant pension wealth and could begin considering how his pension and other assets should be managed as part of his wider estate planning.

Most importantly, the client left the review with a much clearer understanding of what his retirement could look like and greater peace of mind about the decisions he needed to make.

You can also read our other financial planning case studies to see how we have helped clients address different financial planning needs.

Could pension consolidation help you?

Having multiple pensions does not automatically mean you should consolidate them. Some pensions contain valuable benefits or guarantees that could be lost following a transfer, so every arrangement needs to be assessed individually.

However, if you have pensions with several providers, have lost track of old workplace pensions or are considering taking a significant amount of money from your pension, a full review can be worthwhile.

In this case, the client initially wanted access to some tax free cash. A wider pension consolidation review uncovered six pension arrangements, a potential £100,000 Income Tax saving, lower ongoing charges and an Inheritance Tax issue that had not previously been considered.

That is why it is important to look at the whole pension position before making a major withdrawal or transfer.

If you are in a similar position, you can get in touch with Castle Stonebridge to discuss your pension arrangements and whether a full review could be appropriate.