Andrew and Elizabeth Cunningham admit that they are not good at managing their money. They have assets of more than £1m but feel they need advice on ensuring a comfortable retirement.
Andrew, 71, is a retired optometrist with pension income of about £44,000. He also does some consulting work for which he earns about £10,000 a year. Elizabeth, 65, is a teacher who hopes to stop working at the end of the year. She earns £24,000 a year and receives a pension of almost £3,000. The Cunninghams own their home in Manchester, which is worth £1m. They love the house it's where they raised their three children and they are loath to sell it. They would, however, entertain the notion of downscaling if financial advisers suggested it was necessary.
The Cunninghams' main concern is a secure retirement. They want to keep their current standard of living and need advice on whether they should investigate alternative investments or begin to cut expenditure.
Robert Lockie of Bloomsbury Financial Planning says the couple needn't worry. “It appears that Andrew and Elizabeth have sufficient assets to achieve all their life goals,” he says.
He does, however, suggest that the Cunninghams plan for the contingency that they may require medical assistance in their old age. “If their expenditure were to increase by £12,000 a reasonable rate for part-time care in the home for one person, their assets would run out when Elizabeth is aged 93. Increased expenditure of £24,000 a year a reasonable estimate of the cost of full-time residential nursing care for one, would cause them to run out of assets when Elizabeth is 79.”
One possibility, says Lockie, would be for the Cunninghams to sell their Manchester home and move to a smaller one. “I understand that you would not wish to do this in an ideal world, but the possibility is there,” he says.
In addition, the Cunninghams want to simplify their investments. The Cunninghams need guidance about making the administration of their investments easier to handle.
Ian Smith at Certified Financial Planning suggests that the Cunninghams consider using a platform or wrap account to make their portfolio easier to manage. “Andrew and Elizabeth are disorganised and wish to simplify their finances, and such an account could be used to hold their various Peps and unit trust/Oeics in a portfolio they could access online and could be automatically rebalanced in line with an appropriate asset allocation.”
Furthermore, because Andrew's pension income places him in the higher rate tax bracket, the couple should put more assets into Elizabeth's name to reduce tax, Smith says.
Julie Lord, a certified financial planner at Cavendish Financial Management, has this advice: “From an organisational standpoint, it is important to check what the widow's benefits are in relation to Andrew's various pensions and to ensure that this would provide Elizabeth, together with her own pension income (and also investment income) with sufficient to fund her desired lifestyle in retirement.”
Lord says that Elizabeth must think seriously about how she would manage in the event of Andrew dying before her because she earns so much less than him. “Her expenditure, if she were on her own, may indeed be more than £42,000 or may be less, and this is a question that needs to be put to her.” But, says Lord: “If Elizabeth died before Andrew, it would have only a marginal effect on the overall income position because she earns so much less than Andrew.”
In addition, Smith says, the Cunninghams should be reorganising their investments with an eye to inheritance tax planning. “As a first and highly cost-effective step Andrew and Elizabeth must have wills drawn up that include setting up a discretionary trust up to the nil rate IHT band. This can save 40 per cent of a nil rate band £105,200 that would otherwise be lost if they had mirror wills that passed the whole estate to each other.”
Lockie agrees, but has a more sophisticated suggestion of how to use the nil-rate band allowance. “I suggest you each write a codicil to your wills creating a debt in the form of an IOU from the survivor to a suitable lifetime trust, the amount of the IOU being equal to the available nil-rate band at the time of death. The effect is that all of your assets will pass to the survivor without suffering inheritance tax. However, on the death of the survivor, cash to the value of the debt will be paid to the trust with your children as beneficiaries if you wish thus reducing the tax payable on the estate of the second to die. Such a strategy can be implemented by means of a highly robust proprietary scheme which is not considered contentious by the Inland Revenue Capital Taxes Office.”
Lord also recommends that the couple invest the maximum available into Isas each year. “It may not be advantageous from an income tax point of view, but Andrew and Elizabeth can still shelter all capital gains. The Cunninghams need to think about their priorities. It may be necessary to pay more in income tax in the long term in order to make significant savings in inheritance tax. But they need to ask themselves: what is more important?”
Names have been changed to protect identities.
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