Henry Mackintosh is a 50-year-old retired police officer who would like to provide security for his wife and two young children.
Since he left the police force last year, after 31 years, Mackintosh has received a police pension of £22,700 a year. He supplements this with his work investigating civil claims, which earns him £11,000 each year.
Mackintosh also pays into a local government pension scheme which will pay out £2,652 a year when he reaches 60. His wife, 36, has no pension savings, and earns £6,000- £8,000 each year.
Since Mackintosh’s pension commenced, the couple increased the amount in their savings portfolios. They invest £950 a month into various funds and have saved £74,500 into building society accounts and £125,750 in unit trusts. They expect to receive around £5,500 in interest from these investments this year. The savings are all kept in Mrs Mackintosh’s name.
Mackintosh began investing around 10 years ago and manages all his investments himself. “We probably need to more or less maintain the same income in retirement,” he says. “I am hoping this is possible even if I stop working when my pension becomes index-linked at 55. We seem to be living within our means but I only reduced to part- time working recently so have not had the time to assess the effects properly.”
Mackintosh would like to know whether his wife, who is a UK resident but French domiciled, should start saving for a pension and whether they should carry on building their portfolios or change their financial strategy. They have wills and have taken out life insurance that will pay out £100,000 if either of them die and an additional £45,000 if Mackintosh dies before 65. They own their £425,000 home outright and have no debts.
Jonathan Fry, certified financial planner at Jonathan Fry & Co, says that estate planning raises some potential problems for the couple relating to Mackintosh’s wife’s non-UK domiciled status.
“Assets passing between UK domiciled spouses on death are exempt from inheritance tax (IHT) but if Mackintosh were to predecease his wife while she is non-UK domiciled then there is only the limited spouse exemption of £55,000 exempt from IHT,” he says.
If Mackintosh survived his wife and assets in her name were passed to him they would benefit from spouse exemption. “This is an important issue,” says Fry. “Mackintosh and his wife should take legal advice from a solicitor who is conversant in dealing with non-domiciled estate planning.”
A taxpayer is deemed domiciled in the UK if he or she has been resident in the country for at least 17 years of the previous 20 tax years so it is likely, says Fry, that at some point in the future Mackintosh’s wife will be deemed UK-domiciled. She might therefore consider buying term insurance to cover the IHT until she has the same domicile status as Mackintosh.
Mackintosh and his wife have joint assets that exceed £600,000, which the advisers say puts them in a position of reasonable financial security along with the police pension. The life cover of £100,000 is sensible, says Fry, and should be reviewed regularly.
James Norton, certified financial planner at Evolve Financial Planning, says the more investments that Mackintosh can place within an Isa, the better. “It is possible to invest up to £7,000 per year into a stocks and shares maxi Isa,” says Norton. “That rises to £7,200 in April 2008.”
However, he stresses that the most important aspect of an investment portfolio is that it is commensurate with the level of risk an investor is comfortable with. “My main comment to make regarding the investments is that they are all invested in high-cost ‘actively-managed’ funds,” says Norton.
Norton advises creating a core portfolio which focuses on index-tracking funds, to keep investing costs to a minimum. Finally, he says “consider rebalancing the portfolio on a structured basis. Consider locking in some of the gains”.
Gordon Wilson, chartered financial planner at Thomson Shepherd Limited, recommends keeping a reserve of around 20 per cent of their liquid assets, or £40,000.
One long-term plan that Mackintosh has been considering is creating pension plans for his children. Wilson says from a tax point of view these are highly efficient.
“Up to £2,808 per annum can be contributed on behalf of each of the children and this is made up with tax relief to £3,600 regardless of the tax position of the child,” says Wilson. “This course would however jeopardise the short-term aims of funding education and property purchase. The funds would not be available until the children reach age 55.”
Wilson thinks it is important to meet Mackintosh’s primary objectives and if any surplus arises, pensions for the children could be considered.
Names have been changed