Retirement Planning Case Study
Informed Choice managing director Martin Bamford was featured in Financial Planner magazine this month.
Financial Planner is the official magazine of the Institute of Financial Planning. Each month they publish a ficticous client case study and invite two Certified Financial Planner (CFP) professionals to provide a response.
The case study
George and Ann are retiring and returning to the UK having lived in Malaysia for the last twenty years. They have three children, James, Anna and Simon all married, Anna with three children and James with two.
They have a house in Oxford mortgage free.
Ann, aged 60 has a good final salary pension from the engineering company she has been working for in Malaysia paying out £30,000 per annum. She has £80,000 in ISAs, mainly invested in equities.
George, aged 75 has a personal pension pot worth about £200,000, also invested in equities. It has taken a bit of a battering over the last few years and he is not sure whether to reconfigure it out of equities now or stay in and see what happens.
George benefited from an inheritance when his parents died in the 1980’s and left him money which is now invested in ISA funds (about £40,000 worth) and equities, now worth in total about £400,000. Neither of them have invested in ISAs this year.
They want to maintain and grow their capital and secure some income. They want to know what income they can get from their investments and what might be left to help with grandchildrens’ school fees.
George and Ann rightly view now as a good opportunity to conduct a review of their finances, as they move into retirement and need to understand how to best manage their wealth.
At first glance they appear to be in an enviable position. They will own their property without a mortgage and Ann has a stable income for life from her defined benefits pension.
Between them they have £520,000 in readily accessible investment capital and George has an additional £200,000 in a personal pension fund, capable of generating both cash and income.
Of course their seemingly strong financial position is all relative to their expenditure requirements in retirement and other financial objectives in life. What looks at face value to be a reasonable level of income and capital might turn out to be insufficient to achieve all of their goals. For this reason, a starting point is a better understanding of their regular and exceptional expenditure needs.
Assuming George and Ann want to maximise their income today, but do the best they can to preserve their capital in retirement, they will need to make some decisions about George’s personal pension, their State pension benefits and the income capable of being generated from their various investments.
As George has reached his 75th birthday, he has a decision to make about his personal pension and that decision will involve taking benefits from that plan. He must either purchase an annuity with the pension fund or move into alternatively secured pension. In both cases he can take up to 25 per cent of his pension fund as tax-free cash, which would be advisable to retain access to this capital and preferable from a taxation perspective.
The most competitive annuity rates on offer for George, as a non-smoker and as someone in good health, would be 7.2% for a level income or 5.3% for an income escalating at 3 per cent per annum. Assuming he takes the maximum tax-free cash, leaving a pension fund of £150,000, this results in gross income of £10,800 or £7,950 per annum respectively. In both instances this annuity is guaranteed to be paid for five years and then for the rest of his life, and would provide an income of 50 per cent to Ann in the event of his death.
The maximum income from ASP would be 90 per cent of the basis amount of £85.50 per £1,000 of pension fund, so £11,543 per annum, with a minimum gross income of £7,054. If George wishes to maximise his income from this pension fund then this option could be preferable, although on his death the remaining fund could provide a survivors’ benefit to Ann.
Both George and Ann need to find out if they have any State pension entitlement which would supplement their other income. Ann should also be aware that her final salary pension income is only as secure as the engineering company in Malaysia, and would not be covered under the terms of the Pension Protection Fund in the UK.
There is an important decision to make about the investment strategy for their other capital. Remaining fully exposed to equities over the past few years has been a high risk strategy and by holding their nerve during the past year they should have recovered much of the market losses. Now they are entering retirement it would be a good time to diversify. They are clearly not risk averse, but a more balanced portfolio would protect their wealth from the worst of future market falls.
In terms of income from invested capital, both can receive tax-free income from their ISA portfolios and they should make use of their ISA allowance for this tax year, each investing £10,200 within an ISA. This money could come from George’s unwrapped equity portfolio, assuming he is happy to transfer this inheritance money to Ann to generate joint income.
Once they have quantified their likely regular and ad-hoc expenditure requirements, they need to speak to their children to find out the cost of contributing towards school fees and then understand if this is affordable.
Their age difference is a planning issue, and based on average life expectancy Ann can expect to outlive George by around fourteen years. They should take this into consideration when structuring their finances and planning an inheritance for their children. They also need to ensure their wills are up to date and they have both put in place a lasting power of attorney.