Kevin Short and Ruth Kirtland are long-term partners who live together in Essex with their three sons; Edward, eight, Jasper, six, and three-year-old Rupert (pictured above).
Kevin, 47, works as a manager at construction firm Tarmac, while 45-year-old Ruth works part-time as a nurse at an NHS hospital.
Kevin and Ruth’s key objectives are to understand whether they’re in a sound financial position to provide private secondary school education for their children, and to establish what pensions they’ve acquired over the years and if they’ll be enough in retirement.
The couple earn a combined £73,000 a year.
In terms of pensions, Kevin has:
- Two defined contribution pensions with Tarmac; one projected to be worth £443,000 at age 65, and another projected to be worth £206,000 at age 55.
- Two defined benefit (final salary) pensions – one with Tarmac, which is projected to give £10,520 a year income from age 65 and one with Hanson, which is projected to give £7,942 a year income from age 65.
Meanwhile, Ruth has two final salary pensions from the NHS – one projected to give £7,769 a year income from age 55, plus a cash lump sum of £23,208, and one projected to give £255 a year income from age 55.
The couple’s home is mortgage-free and they also own a buy-to-let (BTL) property, from which they receive £675 in rental income each month. The BTL property has an outstanding mortgage of £95,000 (£562 a month over the next 16 years). The mortgage has a connected offset savings account with £17,000 on deposit.
Kevin and Ruth have an additional £8,500 in cash and stocks & shares.
The children have about £64,400 between them saved in a mixture of Child Trust Funds, Junior Isas, and Virgin Stakeholder pensions. Kevin’s father also has a Discretionary Trust Fund set up for his grandchildren with each child currently set to get around £58,000.
This is where Paul Davis (pictured above), an independent financial adviser (IFA) at Clear Financial Advice in Billericay, Essex steps in. Paul was rated among the top 250 IFAs on advisory website, VouchedFor, in 2016. The firm he works for, Clear Financial Advice, covers everything from investments and retirement planning to protection and business advice. His advice for the couple is as follows.
Private school education will be unaffordable
The cost of private secondary school education is generally £15,000 to £20,000 a year, per child, from ages 11 to 18. Even assuming the fee remains the same for seven years, which is unlikely, this would cost between £315,000 and £420,000 in total for the three children.
From analysing the couple’s finances – they have a disposable income of £250 to £750 a month. Even with the help of Kevin’s father’s trust fund, there is clearly a shortfall. So this objective is unlikely to become achievable unless the couple have a significant increase in their income or receive a large capital sum.
Kevin says: “This has been a good exercise to undertake because while it’s every parent’s dream to provide the best for their children, the cost of that can be prohibitively expensive. I agree with Paul’s analysis and we’ll take on board his comments, but I’m not writing it off as an option just yet. One option, for example, could be for the children to go to a state school for the first few years and if it’s appropriate, change to a private school, which would save on costs.”
Kevin and Ruth should keep their pensions
I have analysed Kevin and Ruth’s attitude to risk using the Old Mutual Wealth Risk Questionnaire, which found their attitude to risk as ‘medium’. Including this in my evaluation of the couple’s pension schemes, I recommend Kevin continues with his two defined contribution Tarmac schemes. However, he should increase his monthly contributions to meet his retirement fund goal.
When it comes to the couple’s defined benefit pensions, our company is not authorised to provide advice on whether they should retain or transfer their pension schemes. If they wish to review these schemes, they should speak to a pension transfer specialist.
Moneywise says: Many IFAs remain wary about transacting defined benefit pension transfer cases and the potential future liability that comes with them. This is a complex area, and there is always a risk when somebody opts to give up a guaranteed income. To find a pensions transfer specialist, visit www.moneywise.co.uk/find-an-ifa .
Change the kids’ pensions
I recommend they transfer their children’s Virgin Money Stakeholder pensions to Old Mutual Wealth’s ‘WealthSelect CRA 6 Active Managed Portfolio’ Collective Retirement Account. This is an advised investment solution, which means the couple can only invest in it if they retain the services of a financial adviser.
My reasoning for selecting this option is due to Virgin Money’s high annual management charge of 1% a year, for only five investment funds to choose from (Old Mutual has 1,450 funds available), and the fact that these funds don’t match Kevin and Ruth’s risk profile. Old Mutual’s portfolio has also performed better than Virgin Money’s over the same time frame.
It costs 0.64% a year, plus a 0.15% to 0.5% service charge depending on how much is invested. We would also charge 1% a year plus an initial 3.5% for managing these pensions. Based on the children’s current combined pension of £30,739, this equates to an initial 3.5% (£1,076 in this case) fee, plus a £297 annual charge, which will rise if the portfolio grows. There are no exit fees to transfer from the Virgin Money scheme to another provider.
Kevin says: In terms of the children’s pensions, I’m pleased Paul’s picked up on the high fees and poor performance. As a result, we will be giving Paul’s recommendations to switch provider serious thought. It could be worth the risk and higher charges investing with him to see if it will deliver improved returns for the children – although I’ll be watching the performance like a hawk.”
Protection planning needs to be considered
Kevin and Ruth are both members of their employer’s ‘Death In Service’ schemes and are eligible to receive sick pay but this cover ends once they leave their company’s employment.
They have no other life insurance policies, which would pay out in the event of their deaths, or critical illness, which would pay out if they were diagnosed with a critical illness. The couple have £19,000 in cash savings, but this will only offer short-term protection.
As they have a young family and their three sons are financially dependent upon them, I strongly recommend they consider taking out income protection policies should the worst happen. These would provide 50% of their salaries a month until the age of 67 with the cover starting once their employer’s sick pay ends. I recommend Legal and General’s policy, which would cost around £102 a month for Kevin and £32 a month for Ruth.
I also recommend that they take out a mortgage protection plan for the remaining BTL term. My recommended joint policy from Scottish Widows costs around £81 per month, while my recommended two single policies from Legal & General would cost around £49 for Kevin and £38 for Ruth. Two policies means you’ve got two separate sets of cover.
Last but not least, a Family Income Benefit plan would provide £1,000 per son each month in the event of either of the couple’s deaths, for a term of 18 years. Again, I suggest the £3,000 a month increases in line with the RPI.
My recommended provider Aegon has quoted a cost of around £67 per month. I would also strongly advise the mortgage protection and family income benefit plans are written in Trust. The main reason for this is trustees do not need to wait for probate to be granted before accessing the life cover proceeds, and it means the proceeds are likely to fall outside your estate for inheritance tax purposes.
Kevin says: “Ruth and I have discussed this at length, and what Paul is suggesting is entirely sensible, but we’re not sure we need it. We do have funds available if things go wrong and we’ve got two properties.”
Getting married makes clear financial sense
It is not within my personal capacity to formally recommend you get married. However, in my opinion as a financial adviser, it makes clear financial sense to do so.
There are a number of situations where being unmarried could affect your financial situation upon one of your deaths, namely:
You are not exempt from paying inheritance tax on your partner’s estate when they die. In your case, your home is owned in Kevin’s sole name, which means on Kevin’s death, the property would form part of his estate and potentially be liable to inheritance tax.
You are not entitled to inherit your partner’s nil-rate inheritance tax (IHT) band of £325,000.
Ruth would have to provide evidence of financial dependency to qualify for the widow payments from Kevin’s final salary pensions.
You are potentially liable for Capital Gains Tax on transfers of assets between you which produce a gain higher than the annual exemption amount of £11,300 for the 2017/2018 tax year.
Kevin says: “It’s not the most romantic thing to consider when deciding to get married, but it’s certainly something we’ll consider.”
Kevin concludes: “I think the process as a whole has been fantastic. I don’t think we would have ever got around to talking to all of our providers ourselves. Paul’s advice has provided us with the means to discuss planning for the future.”
None of the above should be regarded as advice. It is general information based on a financial report conducted by Paul Davis, an independent financial adviser (IFA) at Clear Financial Advice in Billericay, Essex.
Key recommendations for Kevin and Ruth:
- Shelve plans for private school education.
- Transfer their children’s pensions.
- Take out protection policies.
- Consider the tax benefits of marriage.
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