A wealthy family, unaware that they were going to run out of money
Why they came to us
Although wealthy, they were confused about their finances.
They had many advisers but no one co-ordinating everything to tell them the truth about their money. They instinctively felt that something was wrong, but had no idea about how serious their position was. Because they felt uneasy, they found it difficult to discuss money together.
In their mid-forties and both had been married before. He was employed, with substantial capital and a large personal pension. He really enjoyed his work and wanted to continue to do it for as long as possible – into his seventies - but not at the current pace.
Borrowing: There was a mortgage with no plans for repayment.
Investments: They were running down their portfolios. They had four investment managers, all working independently and without knowledge of each other. He had ‘collected them’ over the years, mainly after discussions at dinner parties. He regularly asked whether he could withdraw large sums of money from his portfolios. They thought he was asking permission and answered ‘yes’. They didn’t understand his question was really ‘can I afford to draw that amount?’. They were taking more than their portfolios would sustain.
Risk: The investment managers all invested in much the same way. If the market crashed their investments would all fall at the same time, and take the same time to recover. Our clients would either have to reduce their standard of living or run the risk of selling at the bottom of the market and running out of money even sooner.
Fees: The portfolios all had high fees: over 2% pa is expensive in today’s low investment returns.
Estate planning: There was a trust for their son but not for the three children of her first marriage.
Their wills were not flexible enough to take account of actual family circumstances when they eventually die.
First we met them together so they started a conversation about their money and understand the truth about their situation. After initial concerns they found it liberating.
We explained that if they didn’t withdraw less from their portfolios, they would run out when they were in their seventies. This was a shock, but it was easier for them to accept the truth at a meeting guided by us as impartial advisers, not taking either side.
Second they completed a detailed expenditure forecast which showed them they were spending too much.
We then helped them to prioritise their ‘wish list’: travelling more, involving and helping their children, working less, spending more time together. We discussed downsizing to a smaller house in their seventies (when their children would be leading independent lives), so that they would release more capital to spend.
What was achieved
They are now comfortable with their money and talking about it. They will not run out before retirement and feel relaxed now that they’ve solved important family issues around their children’s inheritance. They are both much happier.
- They agreed together on a realistic long term financial plan. They will meet us every year to keep it on the right track. Each year the plan will include a list of the things to do immediately, and things to defer. With us, they helped devise their own plan and they no longer feel stressful discussing money and plans for the future.
They are spending less but still enjoy a high standard of living. They now have enough money to last their lifetime. They won’t run out of money or need worry about money.
- He changed to working part time. He now feels confident that he can continue doing work he enjoys into his seventies. He couldn’t have done if he had tried to keep going at his previous pace.
- He was able to give the children from her first marriage deposits to buy flats.
- We consolidated their investments and his pension into a single portfolio, invested across six managers. Each of them complements the others, so at least one manager should be up in any year when the clients need to draw from them.
They can now see everything in one place and really understand how their money is being managed. The portfolio structure makes it simple to take advantage of her lower tax position, and use ISAs for themselves and their children.
Paperwork is now restricted to a single source. Their tax reporting is simplified and online valuations and transactions mean that they can check their situation 24/7.
The charges are much lower.
- They repaid their mortgage from investments and reduced their outgoings. It also reduces their risk: if interest rates increase, the value of their investments may fall.
- His pension fund is close to the lifetime allowance, so he has stopped paying in. At age 55 (the earliest he can draw on it), he will take maximum tax-free cash to limit the build-up of value which will be subject to a surtax. If he dies prematurely, he has instructed that his step-children will get the pension pot (which will be free of tax). Both are now on track to get full state pensions.
- Their wills have been changed to leave everything to a discretionary trust when they both die. Their letters of wishes are flexible so that, on their death, their executors have discretion how best to distribute capital and income to best meet their wishes. This means that their son and her children will receive the sums that our clients want, at the time which is best for the children. The letters of wishes can be updated regularly to take account of changing circumstances without having to change the will.
- Potential inheritance tax (IHT) will be reduced. We calculated how much capital they will get through in their lifetime. There is now a surplus which can be given away in their lifetime. As they are too young to make significant gifts, we arranged a relatively inexpensive life policy which covers the potential inheritance tax for the next ten years before the gifts are made.
- They drew up lasting powers of attorney so that their finances can still be managed if either or both of them should lose mental capacity.