Susan and Keith Waite are less than 10 years from retirement. They want to improve their financial position and protect their 12-year-old grandchild
Keith and Susan Waite live in Newcastle upon Tyne with their granddaughter, Courtney, aged 12.
Keith, 56, is a joiner by trade and had been self-employed until a year ago when he decided to get a job that wasn’t so physically demanding. He’s now employed as a maintenance contractor and handyman.
Susan, 57, was made redundant in November 2016. She had previously worked in office administration. She hopes to find a new job and has a few interviews lined up. Susan receives Jobseeker’s Allowance (JSA), but her entitlement to this ends this month. She also receives child benefit to help pay towards their granddaughter’s upkeep.
Keith and Susan Waite
The couple have paid off their mortgage. They do, however, have a bank loan of £7,000, which they took out to pay for a car, as well as about £7,000 in credit card debt – although this is spread across three interest-free balance transfer cards, which the couple actively manages.
In terms of savings and investments, they have:
- £3,600 in savings, split between Cash individual savings accounts (Isas) and savings accounts
- £11,900 invested in Stocks and Shares Isas
- An endowment policy, which is due to mature next June, giving the couple £14,000.
Keith has a defined benefit pension (where the amount you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned). This is projected to pay out £2,987 income per year plus a lump sum of £8,961 or £2,400 income per year plus a lump sum of £16,001 at age 65. He also has a defined contribution pension fund (where you build up a pot of money that is invested and can then be used to provide an income in retirement). This pension pot is estimated to be worth £21,400 at age 65. Keith has signed up to his new workplace pension scheme.
Susan has two defined contribution pensions – one estimated to be worth £50,000 at age 65, and the other estimated to be worth £16,000 at age 65.
This is where independent financial adviser (IFA), Peter Collins (left) of Lowes Financial Management in Newcastle Upon Tyne, steps in. Peter joined Lowes in 1984 and specialises in later life planning. He is a fellow of the Institute of Paralegals and a member of the Society of Will Writers. Lowes Financial Management, meanwhile, advises clients across a range of financial issues, such as inheritance tax planning, investment management, pensions, tax mitigation, and long term care.
Peter’s advice for the couple is as follows:
Keep a rainy-day fund
Before considering other investments, Susan and Keith should keep an adequate reserve of cash for emergencies and short-term spending requirements, both known and unknown, which I feel should be at least £3,000.
However, the couple should regularly review their accounts to ensure that interest rates are competitive.
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The couple’s Stocks and Shares Isa is invested in Royal London’s UK Growth Trust (Accumulation) fund, which is slightly higher than the couple’s attitude to risk, but after discussing it with Susan and Keith they agreed not to make any investment changes until their endowment policy matures next year, at which point they may decide to add to their Stocks and Shares Isa.
While the couple’s car and credit card debts could be fully repaid from their available savings and investments, the advantages of clearing this debt should be balanced against the returns they get from their invested capital, and the peace of mind in knowing that they no longer have any outstanding debts. There may also be financial penalties associated with the early repayment of the bank loan, so I advise that Susan and Keith investigate this.
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Consider using endowment funds to pay off their loans
I recommend the couple keep their endowment policy in force until it matures next June when it will be worth about £14,000. This lump sum is expected to exceed what they could get by surrendering the policy early.
The couple should consider using the £14,000 from the endowment to clear both their car loan and credit card debt. Any leftover funds could then be invested into their Stock and Shares Isa.
Susan says: “We might use the endowment funds to bring the car loan down and to make an overpayment on the credit cards. But we also need new double glazing for along with anything else we need, we might use the rest to invest in our Isas.”
Transfer one of Susan’s pensions
I don’t recommend any urgent changes to the couple’s pension plans. Their pensions match their risk rating and one of Susan’s pensions comes with the benefit of guaranteed annuity rates, while Keith has a defined benefit pension that will rise in line with inflation.
However, Susan should consider transferring her £50,000 in The Pensions Trust (TPT) scheme to another provider (this pension doesn’t offer the guaranteed annuity rates). I would recommend Zurich’s Personal Pension, which is a more cost-effective plan with access to a wide fund range and modern pension flexibilities. The portfolio we would recommend has been developed in-house by Lowes Investment Team for capital growth within Susan’s attitude to risk.
Susan says: “Knowing where we’ll stand come retirement has been really helpful and we’re pleased to hear the forecasts are more substantial than what we expected. This means we should have enough when we come to retire once you also factor in our state pension forecasts. I’m still considering whether to transfer my TPT pension, as if I take it from age 60 that’s less than three years away so I’m not sure if it will be worth it.”
Keith and Susan with their granddaughter Courtney
Take out life insurance
I recommend the couple keep their existing endowment and critical illness policies until the end of their terms next year. The endowment policy comes with life insurance cover of £32,500 on death from Scottish Widows. The joint life critical illness policy comes with cover of £22,500 from The Co-operative. However, I don’t feel the level of life cover is high enough, so I’d recommend the couple take out a level term insurance policy in addition – or as soon as their current policies expire – to last until their granddaughter is at least 18.
A level term insurance plan is designed to pay out a lump sum to your beneficiaries if you die within the plan term. I’d recommend Aegon’s policy, which would provide a £100,000 lump sum on a joint life, first death basis, and costs £39.13 a month assuming it’s taken out to cover the next six years until Courtney turns 18.
Susan says: “It is certainly worthwhile us doing this, but because I’m not working at the moment it’s something we’ll look into once I’m employed.”
Re-write wills and get Lasting Powers of Attorney
I estimate that the couple’s net assets, including their home, are below the current inheritance tax (IHT) threshold of £650,000 for married couples, and would therefore not give rise to an IHT liability.
However, an important aspect of financial planning is the need to have a valid will to ensure your estate is distributed according to your wishes. The couple both have existing wills but, as it is some time since they were drawn up, I suggest these should be reviewed and, if necessary, updated.
Keith and Susan should also consider each getting a Lasting Power of Attorney (LPA), which allows them to appoint a trusted relative or friend to have the legal power to act on their behalf, should the need arise.
Susan says: “Our wills haven’t been updated since Courtney was very small and there have been a few changes in circumstances since then. Seeing Peter was the nudge we needed to get them updated, which we’re in the process of doing.
“With the LPA, we’ll probably wait to do this until I’m employed as we don’t have the funds to pay for this at present.”
Susan concludes: “Peter was brilliant and explained everything in easy-to-understand language. He also took on board our individual circumstances, understood what we wanted to fi nd out and came up with the report, which we’re very happy with.”
Key recommendations for Keith and Susan:
- Preserve rainy day fund.
- Use endowment to pay off debts.
- Boost life insurance protection.
- Re-write wills and arrange Lasting Powers of Attorney.
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None of the above should be regarded as advice. It is general information based on a financial report conducted by Peter Collins of Lowes Financial Management in Newcastle Upon Tyne.