A new client approached us who owned his own business and was approximately 5 years from retirement. He wanted guidance on how to make best use of his existing funds and how to organise his finances to provide an income in retirement.
Mr Morse owned a successful small business that was generating a decent level of profit of around £100,000 per annum. He owned all of the shares and his wife was carrying out part-time work for the business on a salary of around £10,000 per annum.
Mr Morse took a combination of dividends and salary from the business which took him into the 40% tax bracket. Mr Morse had built up a pension fund worth around £600,000, although this was not immediately clear as it was held in a range of different pension funds with a range of providers. With the statements all turning up at odd times there was never a clear picture about the overall value and no overall investment strategy was in place. Mrs Morse had deferred NHS pension benefits worth around £2,000 per annum.
They have both used their cash ISA allowances in recent years and so had amassed around £120,000 in cash ISAs. They also had some existing investments worth around £120,000 plus cash reserves of around £200,000. They had no mortgage or debt and were able to live very comfortably on their income from the business.
Over the course of two meetings we obtained all of the necessary details about their existing financial arrangements. We discussed at length their goals, objectives and investment preferences so that we established what was really important to them.
Having established how much income they needed to live on in retirement, we carried out a Lifetime Cashflow forecast and could see that their existing assets were likely to fall significantly short unless further action was taken. There was the possibility that the business could be sold in 5 years’ time and the proceeds may potentially cover some of the shortfall. There was no certainty that this would happen but Mr Morse wanted to plan for this eventuality.
In the first instance we created a draft plan and then met with Mr Morse’s legal adviser and accountant to put in place a strategy that would more actively make use of Mrs Morse’s tax allowances. Given that they had a long and stable marriage and she was a long standing employee, there was no logical reason why she should not effectively have a greater stake in the business. Mr Morse, therefore, transferred some shares to her so that in the event of the eventual sale of the business, her Capital Gains Tax exemptions and personal tax rates could help reduce the overall tax liability. Importantly providing Mrs Morse with some more shares meant that she could benefit from receiving dividends over the next 5 years which would again reduce the family’s overall income tax liability.
As a higher rate tax payer and the main wage earner, Mr Morse had been focussed on making pension contributions from the company into his sole name. We pointed out the danger that he may well end up paying higher rates of income tax on his pension income at a later date whilst potentially Mrs Morse would not have sufficient pension income to even cover her annual personal allowance. We therefore started to build pension benefits for her by making substantial company pension contributions after taking into account unused relief from previous years that could be carried forward. This utilised the ongoing spare profits in the business in a very tax efficient way.
We contacted all of Mr Morse’s various pension providers and reviewed in detail the benefits of each of the plans. We concluded that, of his six arrangements, two were worth holding onto until retirement age and the other four should be transferred into a new Self Invested Personal Pension that we set up at a very similar cost to the existing arrangements. With this new plan we could apply our detailed guidance, review service and incorporate a much wider range of funds capable of delivering a more tailored investment strategy that met their needs. More importantly using a pension contract that could provide all of the necessary flexibility that exists under the new pension rules where many old style contracts fall down.
Aside from the pensions, retirement planning should include other tax efficient investments such as ISAs. In this instance, as part of our overall investment strategy, we were able to make better use of the existing ISA accounts. These were not very efficient as a retirement plan as they were cash only ISAs with little or no interest being added annually. We transferred these into investment ISAs where the ISA could be much more effective at providing a tax free return above inflation due to the potential for higher growth opportunities.
We also started to build an investment portfolio using some of the other spare cash reserves so that, at retirement, they could use their annual Capital Gains Tax exemption to generate additional tax-free income of over £22,000 per annum between them.
We ensured that they retained a very comfortable level of cash savings to allow them to take a medium to long term investment approach with the funds in their portfolio and pension.
Their revised financial plan meant substantially less ongoing income tax and corporation tax over the 5 years and also meant that in retirement their assets would be more evenly distributed so making full use of Mrs Morse’s income tax and Capital Gains tax exempt allowances. They now receive a detailed 6-monthly statement showing the value of their ISAs, investment portfolio and pensions with detailed performance figures and breakdowns of how the investments are held. This information includes a regular update about the level of risk being taken in the portfolio and linking this to their personal circumstances and attitude to risk.
They are now one year into retirement and we continue to work closely with them in order that they can have a great deal of flexibility on accessing capital and income in the most tax efficient way possible. They are very happy with the outcome of their plan and feel financially well organised and are now much more confident about their financial future.
