Diane and Mark were senior house officers in a London hospital when we first met them back in the mid 80s.
At the time it was all about them having a great time before they married! We simply arranged some income protection policies, just in case, and then as the years went by things got more complicated.
What we did then in the 1990s
They married and had 3 children into the early 1990s, and living in London meant they had a large mortgage. It was all about surviving for a while and we helped with the mortgage, adding life protection to cover the loan and the family. In addition, their income protection and locum cover were updated to reflect their higher earnings.
Wills and Enduring Powers of Attorney were also fully updated.
As Diane & Mark became more senior, debt repayment became their priority and they managed to reduce their debts considerably. They also told us that their fathers’ had set up various small savings plans for them over the years, which they had ignored as they did not pay for them.
The years go by
By 2015, with them now both turning 50, a major update was required as many of their circumstances had changed. We asked Diane & Mark to really think about their priorities and concerns, which were:
Their goals now
- Gain peace of mind by feeling financially comfortable and improve quality of life with the freedom to work less in the next few years and retire at maximum age 60
- Ensure the children are secure, and help with property deposits/mortgage reduction when they can
- Having had many family holidays over the years, to now start to think about just going away together
- Vital to have access to funds to do this even though working less and retirement is now on the horizon
- Be able to spend more time together, as well as with the family, and generally increase spare time
- Ensure they can look after elderly parents as best they can
- Stay healthy and fit – Mark running & Diane pilates
- Understand their overall pension situation and what it means to them
- Reduce the risk of not achieving their goals in life
- Diane has a stressful working week with 6 days the norm, and Mark similar
- Very low tracker mortgage now coming to an end
- What to do with the considerable cash reserves they had managed to save in the last few years?
- The cost of living as they get older
- The impact on NHS pensions with regard to working part time until age 60
- Can they afford to help their children with property costs?
- Not having to worry about money now and in the future by feeling informed and in control
- What about Inheritance Tax? Can they mitigate this somehow?
- What to do with Diane’s personal pension that her accountant set up?
- Do they need to action any protection (with regards the Lifetime Allowance) for their NHS Pensions as they have read these are important?
- Would downsizing their home help, as they wanted a smaller home in retirement, ideally in their 70’s
- Do they need to keep the level of cover in the protection policies as their circumstances are very different?
Now fully understanding their needs and concerns, we compiled a Financial Map for Diane & Mark which measured their goals against their current and future financial position and assets.
Their assets comprised of:
- NHS Pensions of c£45,000 per annum (pa) gross for Diane, and c£25,000 per annum (pa) gross for Mark with lump sums at age 60
- Full state pensions for both (payable in 2027)
- Cash savings, £90,000 (keeping £40,000 back for tax etc) and (parents) savings plans £32,000
- Small endowment maturing for c£19,000
What We Did
- An immediate priority was that Diane’s NHS Pension fund value was c£1.22m, way above the £1m Lifetime Allowance limit. We therefore ensured she instigated Individual Protection 2016, which allowed her to retain up to the £1.25m level, saving a considerable amount of tax
- We assumed that, for the time being, Diane would not utilise her personal pension, and she would nominate the children as beneficiaries, thereby helping reduce potential Inheritance Tax
- The next step was to further update their long-term financial plan (Financial Map), which would include measuring their income and assets against their projected outgoings of c£6,200 pm until age 60
- Expenditure would then decrease to £5,700 pm in retirement, and to £4,000 pm at age 75
- We advised them to cancel a lot of their protections products: life cover, as the children were increasingly independent, the mortgage was gone and NHS cover was high; income & locum protection, as their needs were now much lower and NHS cover was high on invalidity
- We used £100,000 (in today’s monetary value) as gifts to their children as a lump sum in 2021
- We assumed a 1% net return on cash and 4% net on their risk assessed portfolio, which could be withdrawn as and when required
- Both Diane & Mark would reduce their work commitments now, to 3 days per week each until age 60 – and demonstrating that going part time would hardly make a difference to their NHS Pensions
- Both Diane & Mark to be fully retired by age 60
- As their very low mortgage rate was ending, they would pay off the loan now using cash and the value of the savings plans started by their parents and the endowment
- Use the £2,000 per month previously spent on the mortgage to start a new tax efficient retirement fund for holidays and the children’s property needs
- Inheritance Tax will almost certainly be an issue in future, and a joint life insurance policy for £300,000 to be implemented to help mitigate this
- They would look at downsizing their home in retirement to see if it was necessary to fund their ongoing lifestyle, and further review their Inheritance Tax position then
Position before downsizing
Having updated their Financial Map, we looked at their position before downsizing.
This was fairly healthy, illustrated by their capital in blue in the chart below. However, by their mid 70s funds were getting low.
The value on the left is in today’s pounds, with age along the bottom axis (which runs to age 90).
Diane & Mark were reassured by these results, but a big concern was their mid 70s situation with funds getting low.
Also, the more they thought about it, this would be a good time to perhaps gift more money to their children if it made sense, and taking into account the Inheritance Tax rules at the time.
So we looked at them downsizing age 70, and using £300,000 in today’s terms, growing at 3% pa, to replenish the coffers.
Position after downsizing
This improved matters considerably, and gave Diane & Mark extra funds to maintain their lifestyle, and the cash available to further gift to the children if they so chose.
The table below shows:
- Readily realisable capital is available capital (left column)
- Cash Inflows is income (second last column)
- Cash outflows is expenditure (last column)
- NHS lump sums more than help to gift the £100,000 to the children
- It means that they are eating into their capital to supplement their pensions through to age 70
- Then they downsize, and their position is vastly improved
- It is then projected that their capital will still slightly decrease, but then increase if they reduce spending age 75
- The extra capital means they can maintain their lifestyle and perhaps consider gifting more to the children
What it meant for Diane & Mark
This new strategy, concentrating on what Diane & Mark really wanted, meant that they felt far happier and psychologically, being debt free was a real bonus. It also meant that they were taking less risk to achieve their life goals, as debt was eliminated.
A big plus for them was knowing that going part time did not harm their NHS Pensions very much at all.
As the planning was very thorough, the cancelling of most protection products resulted in a £312 pm saving.
They were now able to plan their new less stressful lives with confidence, with the focus being on updating their financial plan first and foremost every year and analysing the performance of the invested capital.
This peace of mind is invaluable to them.
What lies ahead?
We will continue to work alongside Diane & Mark, updating their plan annually, which will take into account their ongoing aims and aspirations, as well as external factors such as inflation, projected investment returns and Inheritance Tax rule changes.
Enquire about your own personal situation, please complete the enquiry form.