Setting a foundation
Building a career and raising a family
peak and accumulating wealth
Focusing on retirement
Enjoying retirement and passing on wealth
Later life and legacy
We first met Paul and Susan when they were both working at the same law firm and were seeking qualified financial planning advice to help them on the right path. They outlined their plans to get married and to have children so needed a strategy to begin their savings journey to support them in achieving their future goals in a tax efficient manner, and protect their family in the event of unforeseen circumstances.
Over the course of the ‘Setting a foundation’ period, Paul and Susan purchased their first home for £75,000 with a mortgage of £70,000. They were married when Paul was 25 and Susan was 27 and have now had two children Louise and David where Paul took an extended career break to look after the children.
How did we build a foundation for Paul and Susan?
The importance of financial protection
Getting into the savings habit
Protecting Paul and Susan and their children is the cornerstone of the financial advice process, where they have a mortgage commitment together with raising a young family, and could have future plans and essential costs to maintain.
Ensuring that these obligations can be met in unfortunate circumstances is vital and will also provide peace of mind, whether that be recovering from an illness or adjusting their lifestyle to the loss of a loved one.
While Paul and Susan remain young and in good health they are insurable and the premiums for life insurance and critical illness cover are relatively inexpensive. Purchasing insurances later in life may prove expensive and any medical ailments or conditions could make them uninsurable at a time when they most need the cover.
Crowe Financial Planning advised Paul and Susan on a wide range of protection products through the whole of the market to find the most suitable plans for their current circumstances such as:
• Life Assurance
• Permanent Health Insurance
• Critical Illness
• Family Income Benefit
• Income Protection.
After taking advice from their Crowe Financial Planning consultant they have decided to protect their mortgage with a life and critical illness policy which will clear the mortgage debt in the event either of them dies or suffers a serious illness such as a heart attack, stroke or cancer.
In addition, they both take out income protection plans to replace some of their earned income in the event of being unable to work due to long-term sickness or disability.
What does this mean?
Financial planning is about understanding dreams and life goals, knowing the resources they have available, and what plans Paul and Susan need to make to help achieve them. The sooner Paul and Susan start their financial plan, the better the chance they will have to get to where they want to be in 10, 20 or 40 years’ time. It’s the old adage – it’s easier to achieve something that you are aiming for than to drift without having any goals.
After speaking with Crowe Financial Planning, Paul and Susan have peace of mind that they are on their way with an appropriate financial plan to carry them through the accumulation phase of their lives, whilst being financially protected and secure in the event of any unforeseen circumstances.
We explore their key stages, the financial issues that arise at each stage and how we are able to support them through careful planning and advice.
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Under pension Auto-Enrolment legislation, Paul and Susan will be offered the chance to join their company pension scheme and they should certainly take the opportunity. Their employer will pay in money on their behalf; a minimum of 3% of qualifying earnings with 8% being contributed overall between employer and employee. They will also benefit from Income Tax relief on their personal contributions.
Basic rate taxpayers receive £20 tax relief on every £100 invested into a pension and a higher rate taxpayer £40 for every £100. Thanks to compound interest, money invested early can grow significantly over the years and decades. Saving into a pension from early on in their careers could have a big impact on their future. A contribution made in their 20’s is likely to be invested for 40 years plus.
Any extra savings Paul and Susan wish to put aside can be placed in flexible and tax-efficient Individual Savings Accounts (ISAs). They can save regularly or with lump sums and can invest up to £20,000 each into an ISA every tax year. They can invest into cash or stocks and shares ISAs with tax free access to the funds should they need them.
At this stage of their lives, Paul and Susan had a specific goal of saving for a house and therefore saving in a Lifetime ISA was appropriate. A Lifetime ISA has an annual limit of £4,000 and the government will add a 25% bonus to the savings, effectively offering them a ‘free’ £1,000 when using the proceeds towards buying their first home.
• Budgeting income and outgoings.
• Saving for a house deposit.
• Borrowing to purchase a home.
• Joining an employer’s pension scheme (auto-enrolment).
• Protecting income and debt for dependants.
School fees and tax position
Paul and Susan are keen to support their children through secondary education and on into university. They are considering how much capital they will require to fund school and university fees and how this could be generated in a tax efficient manner, using all available allowances, including those available to the children.
As Paul is not working and has no income he is a non-taxpayer, whereas Susan is a higher rate tax payer. With this disparity in their tax positions, they should be considering the most tax efficient way in which they hold their savings and ensuring that Paul’s allowances are maximised where possible and taxes are minimised.
We highlighted the benefits and advantageous tax reliefs of saving into pension plans and how these monies could be used to generate a tax efficient income stream in retirement. We advised them on an appropriate investment strategy and structure to help meet the future cost of the children’s school and university fees using cashflow modelling.
This is to demonstrate how much they needed to save, how these monies should be invested and that the expected cost of funding the fees was achievable and affordable. We advised on a tax efficient savings and investment strategy to make use of all personal allowances and ensured that the overall tax efficiency of their planning was optimised.
We agreed to review their planning, objectives and strategy annually to ensure that their plan remained appropriate for their circumstances so that they could stay on track to meet their objectives.
Paul and Susan had peace of mind knowing that they would be financially secure and that their future plans would not be derailed by an unforeseen event.
They understood the actions that were required to fund the children’s education and were comfortable in the knowledge that, through stress testing possible scenarios using cashflow modelling, their objectives could be met and the funding was affordable and sustainable.
They now have a tax efficient savings strategy, making use of Paul’s non-tax payer status while he remained at home to look after the children. They made their money work harder for them by saving into pension plans and benefitting from Income Tax relief on their contributions.
Financial protection being adapted
Financial protection being adapated
As Paul has just taken a career break and Susan is now the sole breadwinner the family will need to ensure they could provide for themselves and their children in the event that either of them was to die or become critically ill. Due to their disparity in income, they will also need to review their current respective tax positions and utilise any reliefs available to them.
Paul and Susan also wanted to provide a good start for their children by funding their school and university fees. During this stage of ‘Building a career and raising a family’, Paul and Susan have moved house twice and seen Susan’s career take off where she was made a partner at the law firm she worked at and Paul returned to work as a teacher in his forties.
How did we support Paul and Susan?
• Amending family protection.
• Saving for school and university fees.
• Maximising tax allowances.
Paul and Susan are considering the financial consequences if Susan were to die or become unable to work due to an illness. Is there sufficient life insurance, income protection and critical illness cover in place to repay loans and meet normal expenditure needs? What would the financial implications be if Paul was to die?
Although Paul is not bringing an income into the household, he plays a valuable role in looking after the children so that Susan can focus on her career. How much would it cost for Susan to employ a nanny to look after the children and allow Susan to continue with her career?
After reviewing their pension arrangements with their Crowe Financial Planning Consultant, Paul and Susan enhanced their protection insurances and arranged additional life assurance, critical illness and income protection utilising a Family Income Benefit plan.
As independent financial advisors we were able to source the best products and provide that additional financial support through a relatively low cost solution to cover the children until they complete their education.
They should start to consider various 'pots' of capital which can be accessed across the short, medium and long-term and the tax efficiencies of these, both in the present day and also in retirement.
Ensuring their assets are structured and invested in a way which utilises their respective tax allowances is vital and will make it easier to draw income from their assets upon retirement in a tax efficient manner. This will enhance the net return on their hard earned savings.
The need to retain sufficient cash on deposit to allow for accidents, emergencies and unforeseen expenditure is of paramount importance. There are then many issues to be considered when structuring their assets, including the decisions relating to ‘secure’ and ‘flexible’ pension options, the use of ISAs, General Investment Accounts, onshore and offshore bonds and, for any surplus monies, possible investments into higher risk Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs).
Paul and Susan should both consider what scope they have to make pension contributions within their respective annual allowance and whether they have any unused annual allowances from previous tax years which could be carried forward.
As Susan is an additional rate taxpayer, she will benefit from tax relief on pension contributions at 45% (to the extent that she is an additional rate taxpayer) whereas, as a basic rate taxpayer, Paul will benefit from relief at 20%. Therefore, pension contributions should be prioritised for Susan.
In terms of savings, the first step should be to build a portfolio of ISAs due to the tax efficient growth and income they can provide. Importantly, ISAs may be accessed at any age and any amount be drawn free of tax. ISA portfolios can provide a tax exempt source of income in retirement, in addition to access to capital.
The following annual allowances are also available to each in order to generate tax efficient growth:
It is important to ensure that the assets owned are held within suitable tax structures in order to best achieve their objectives. However, the planning opportunities these allowances provide must be considered in tandem with their tolerance for investment risk and capacity for loss. As a consequence, it is important to ensure that whichever 'tax structure' the assets are held in, they are invested appropriately to their circumstances and in a complementary manner to each other.
We advised Paul and Susan on both the strategy and structure of their financial planning, seeking to use their surplus income to their best advantage. Their investment objective was to target capital growth that will then help provide retirement funds from which future income can be generated in a tax efficient manner once they cease work.
They now have a clear focus on their ‘retirement plan’ and are comfortable that they have implemented a sensible planning strategy that will support them in meeting their stated objectives. This plan is sufficiently flexible to adapt to their changing circumstances and priorities.
Career peak and accumulating wealth
Susan and Paul are at the peak of their career and earnings potential. Their income is now significantly in excess of their expenditure with Susan earning over £225,000 per year and Paul earning £45,000 per year.
Paul and Susan are focused on saving as much as they can afford for the future and paying off their mortgage in preparation for retirement. Their house is valued at £800,000 and they have an outstanding mortgage of £375,000.
In addition, they would like to help their children get on the property ladder. A key life event took place during this stage where Paul and Susan inherited £200,000 from Paul’s parents and they gifted Louise and David £30,000 each.
Paul and Susan now have greater financial freedom, with their children having completed their education and left home. Louise went to work in the US and has since got married and had two children while David has established a very good career in the IT sector and with his long-term partner they own their own home. They are also evaluating how much income they will require in retirement to achieve their desired standard of living.
How did we support Paul and Susan?
• Maximising retirement funding and considering level of income required in retirement.
• General tax efficient investing.
• Repaying outstanding debt, such as their mortgage.
• Helping out their children financially with deposits for their own homes/funding weddings etc.
Paul and Susan should find a balance between reducing their mortgage and investing. They should review their mortgage to ensure they have the most appropriate arrangement for them and ensure that while there is a need to pay off the mortgage, they do not incur penalties through paying off more than is allowable (typically 10% per year).
With interest rates currently very low, there is a balance to be struck between the psychological desire to reduce debt and the likelihood of better returns from investing in tax efficient savings vehicles such as pensions and ISAs.
Paul and Susan should begin to consider what they wish their lives to look like in retirement and what the cost of this might be. It will then be possible to target the level of capital savings they will need to make in order for this to be achievable and sustainable. Cashflow modelling can help to project the amount they need to save annually and the level of investment return they need to achieve.
sales from their investments held in General Investment Accounts using their annual Capital Gains Tax allowances of £12,300 each
generating tax exempt dividend income of up to £2,000 per year.
Tax and estate planning
If Paul and Susan choose to downsize their home and release capital, the net proceeds can also be added to their investments, which will boost the income available. They may also be advised to consider other tax advantaged investment vehicles, such as an offshore bond, from which regular withdrawals can be taken to support their income needs in retirement.
Given the current Inheritance Tax (IHT) efficiencies of Susan’s pension, she is advised to only draw down on this fund as required, likely on a 'phased' basis using a combination of tax-free cash and income each year to meet their needs and to reduce her income tax. This requirement would be considered each year at the annual review and planning meetings.
They will also need to start thinking about their wider estate position. This would involve an assessment of the current position and discussions around how concerned they are by the potential IHT liability. There will likely be a number of strategies to consider – making further capital gifts to the children, trust-based planning and IHT efficient investing. However, as these discussions will evolve over the years, one immediate solution is to take out a simple life assurance policy to meet the potential IHT bill.
With sensible planning, Paul and Susan will reach retirement confident that their retirement income needs can be met in a tax efficient and sustainable manner without putting too much strain on their capital. Their hard work over the years has paid off and, by seeking regular advice over the years, their affairs are structured to provide them with financial peace of mind and a high degree of flexibility.
With less than 12 months left until Paul and Susan are due to retire, their primary focus is on ensuring they will have enough of their required net income of £6,000 a month throughout their retirement.
They are planning to sell their home now worth £1.5 million with an outstanding mortgage of £102,000 and downsize to a property in the region of £900,000 to release more capital to fund their retirement. They are also considering long-term estate planning to reduce the Inheritance Tax liability on their estate.
Paul and Susan have, by now, accumulated substantial assets via a combination of saving, investing and inheritance from Susan’s parents of £360,000. They are now considering how they could best use their hard earned wealth to support them in retirement and any actions they should be taking now in advance of their retirement.
How did we support Paul and Susan’s retirement planning?
• Continuing to fund for their retirement.
• Evaluating income options and simplifying their financial affairs.
• Considering tax efficiency in retirement and how best to arrange their investments.
• Repaying any outstanding debt.
• Starting to consider estate planning.
• Combined ISAs of £425,000.
• Taxable portfolio of £235,000.
• Susan’s Self Invested Personal Pensions (SIPPs) of £1.35 million.
• Paul’s teachers pension for 20 years’ service.
• Two x £30,000 NS&I Premium Bonds.
Assets now/at retirement
Having followed the financial planning advice Crowe Financial Planning provided during their annual review meetings, Paul and Susan are now looking forward to a time where they will no longer be working and wish to evaluate how they can meet their income needs in retirement.
With less than 12 months to go until their target retirement date, they asked their Crowe Financial Planning Consultant for advice around a formal strategy to meet their net income target in the most tax efficient manner.
This includes how they will withdraw from their various pension and investment assets in order to meet their £6,000 per month net income target. Susan is keen to ensure that she does not pay higher rates of tax in retirement.
Their consultant produces a formal report and recommendations, including cashflow projections to show the impact of their withdrawals on their capital base over time and to ensure that it is achievable.
There are also a number of pre-retirement planning considerations. Paul may be able to purchase additional years under his teacher’s pension entitlement and/or consider personal pension contributions. They may also need to replace any benefits that drop away in retirement, such as private medical cover or life assurance.
Paul’s teacher’s pension will provide them with a secure and inflation-linked base retirement income. Their taxable investment portfolios and ISAs can now be drawn against for a regular income. If required, they can utilise their annual Capital Gains Tax (CGT) allowances to give them an additional tax-efficient source of money.
• Income generation.
• Income preservation.
• Cashflow planning.
• Tax efficiency.
Paul and Susan need a strategy to help preserve their wealth in real terms (taking account of inflation), achieve their retirement income goal in a tax efficient manner, and begin to consider what they will be able to pass on to the next generation.
Putting in place a retirement strategy and paying attention to the annual tax allowances and concessions provided by the government helps to maximise their income in a tax efficient and sustainable way.
There are a lot of issues to be considered when structuring their assets, including the decisions relating to secured and flexible pension income options, the use of ISAs, General Investment Accounts, onshore and offshore bonds. Consideration also needs to be given as to how their cash savings are held.
Ensuring their assets are structured in a way which utilises their respective tax bands is vital and will help utilise all the allowances available to them, making their net income target much easier to achieve.
Tax exempt income can be provided by the tax free cash from Susan’s pension, their ISA savings and bank account deposits. In addition the following annual allowances are available to each of them:
These legitimate planning opportunities must be considered in tandem with the sustainability of income and their other goals, such as any large capital expenditure items (e.g. big holidays, car replacement and wedding anniversaries), as well as inheritance tax planning.
Paul and Susan’s retirement planning strategy helped them to put in place a sustainable and tax efficient income, as well as protecting the capital value of their assets against the effects of inflation.
This was supported with cashflow planning which demonstrated a sustainable withdrawal rate and modelled the most tax efficient structure for their assets. Importantly, this strategy ensured that the income requirements of the survivor could still be met in the event either of them pass away.
Paul and Susan now feel comfortable that the level of income they require can be maintained for the remainder of their lifetime and their accumulated wealth has been positioned appropriately in terms of both investment approach and tax efficiency. This allows then to focus on enjoying their retirement, secure in the knowledge that they have an appropriate and sensible strategy designed to meet their objectives.
Now Paul and Susan are retired they are focused on enjoying their retirement with the desired monthly income they had planned for. They are also considering what wealth they will pass on to their children and grandchildren and how best to achieve this.
Paul and Susan have now completely stopped work. Their state pensions have come into payment (both from age 67) and they are relying upon these, their investments and other pensions, to generate their retirement income.
Their mind-set is now firmly focused on their lifestyle and fully enjoying their retirement, producing their required net monthly income target of £6,000 and preserving the wealth they have accumulated during their lifetime. They are considering what wealth they will pass on to their children and grandchildren and how best to achieve this as well as planning for potential future care costs.
Paul and Susan take regular ongoing advice from their Crowe Financial Planning consultant to continually review their retirement strategy to ensure it is still meeting their requirements.
How did we help Paul and Susan to generate a tax efficient income in retirement?
tax efficient pension income using the £12,500 personal income tax allowance
sales from their investments held in their General Investment Accounts, using each of their £12,300 annual capital gains tax allowances
utilising their tax-free dividend allowance of £2,000 per year
interest from cash deposits using the £1,000 savings allowance for a basic rate tax payer (£500 for a higher rate taxpayer)
tax deferred withdrawals from an onshore or offshore insurance bond. In addition to the 5% per year of original capital invested, an allowance of up to £5,000 per year to use the starting rate savings allowance.
Making gifts and long-term care
Pension and wills review
In this latter stage of life, Paul and Susan’s thoughts now turn to how to preserve the hard-earned wealth they have accumulated for their children and grandchildren. Their overall wealth stands at £3,135,000 with a potential inheritance tax bill of £314,000.
Paul and Susan are looking for a strategy to help preserve their wealth, pay less tax and pass it on to their children and grandchildren and take advice from their Crowe Financial Planning Consultant.
We helped Paul and Susan to utilise their available allowances and concessions without doing anything that could be considered ‘high risk’. It also used tried and tested planning methods that would not be considered to be aggressive or contentious by HMRC.
We provided advice and recommended a sensible planning strategy which helped them reduce the inheritance tax liability on their estate and pass on more of the wealth they had accumulated to their children and grandchildren, whilst ensuring their own needs are met both now and in the future.
How did we help preserve Paul and Susan’s wealth for future generations?
• Estate planning and mitigating inheritance tax, i.e. gifting surplus capital/income, use of Trusts.
• Wills and Lasting Powers of Attorney.
• Nursing care costs.
Under the pension freedom rules Susan’s pension will not be included in their estate for Inheritance Tax (IHT) purposes and therefore Susan needs to check the nomination and expression of wishes made on her death to ensure that their children and grandchildren have been included as potential beneficiaries.
Paul is unlikely to need Susan’s pension fund to maintain his income requirements in the event of his wife pre-deceasing him. A strategy for drawing less income from Susan’s pension is also considered as this will help pass more capital to beneficiaries without being subject to inheritance tax.
Working with their solicitor, their Consultant advises them to review their wills to ensure that their wishes are accurately reflected and at the same time set up Lasting Powers of Attorney for both Property and Financial and Health and Welfare. This will give them the peace of mind that their affairs will be taken care of by the people they trust should the need arise in the future.
Pension and Wills review
Paul and Susan also decide to utilise their annual gift exemption of £3,000 each to save for their grandchildren. This will be handy when it comes to funding future university fees for them.
They also transfer £100,000 of their invested funds into a discounted gift trust (DGT) to generate an income for themselves whilst gifting the capital to their children and grandchildren tax efficiently on their deaths. This provides an immediate reduction in the value of the gift for inheritance tax and will completely remove it from their estate after seven years, saving at least £40,000 in inheritance tax.
A partial ISA transfer of £50,000 is made into an AIMs ISA portfolio, accepting that this investment is higher risk. This will provide exemption from inheritance tax after two years, saving a potential £20,000 of inheritance tax, whilst retaining access to the funds themselves should they need to in the future.
As part of the overall planning process their Consultant takes into account what their future long-term care needs (nursing care) might be, providing a cashflow analysis of future expenditure and care costs for them. This provides Paul and Susan with the reassurance that they have sufficient provision by way of income and capital to meet this need if required in the future
Paul and Susan now feel that the hard work they have put in to establishing their own wealth (on which they have already paid significant tax over the years) has been worth it and that they can now live their desired lifestyle whilst seeking to pass on this benefit to their children and grandchildren. It also gives them peace of mind that their affairs are well managed and in order.