Money makeover: “How can we prepare as a family for the next stage of life?”

20 July 2018
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We help a couple think about the best options for when their children leave home and they look towards retirement

Jim Wedgbury (pictured above and below) is a 53-year-old retired firefighter who now works part-time as a Tesco delivery driver.

He lives in Ashford, Kent with his wife Jennifer, 48, and their two children Aidan, 18 and Chloe, 16.

Jim currently earns £800 a month from his job at Tesco and pays £40 a month into his workplace pension provided by L&G, which is matched by Tesco. He has accrued about £1,000 to date.

In addition, Jim has a personal pension with Aviva which is valued at around £43,000, and a defined benefit pension from his time in the fire service. This is worth around £20,000 a year from age 50 until 55.

At 55, Jim’s fire service pension of £20,000 a year is indexed annually in line with inflation for the rest of his life, while he’ll also receive a one-off lump sum payment of about £5,000.

Jennifer works part-time earning £900 a month. She has a personal pension fund (converted from a workplace pension) of around £300,000, although she can’t access this until age 55.

Jennifer has accrued this sum through a combination of generous workplace pension schemes topped up with her own contributions.

Jim and Jennifer have the following in savings:

  • Around £25,000 in investment Isas
  • £3,000 in cash savings

The couple want to continue working until their children are out of full-time education and Jennifer can begin taking her pension.

They feel they have sufficient income to cover their living expenses; however, they’re unsure what to do as a family to prepare for the next stage of life, meeting their needs and those of their children.

Jim is also keen to know what effect opting out of his fire service pension will have on his state pension, and whether he should access his L&G and Aviva pensions.

This is where Simon Webster (pictured left), managing director of Facts & Figures Chartered Financial Planners (Fffp.co.uk), based in Ashford, Canterbury, Dover and Maidstone in Kent, steps in.

A former accountant, he has been a financial adviser for over 35 years, with qualifications in advanced pensions, taxation and trusts, as well as considerable experience in wealth management, mortgages and equity release. Here is his advice for Jim and Jennifer.

Look into buy to let to earn a retirement income

Through careful planning, Jim and Jennifer are already fairly confident that their money is unlikely to run out in retirement, which means that their main priority is what to do with what they have.

After careful consideration, the couple concluded that they’d like to purchase a buy-to-let property.

Many agree that property prices in the South East are likely to continue to rise, and the rental market in Ashford is buoyant.

Jim and Jennifer are confident that they could buy a house for £200,000 and rent it out to cover the cost of an interest-only mortgage, plus expenses, and still see a steady return of 3% capital growth – equating to around £6,000 a year.

In addition, they feel that owning a second property might help give their children a step up on the property ladder later down the line.

Buy-to-let mortgages are available for up to 75% of the purchase price. But to protect the lender in case rates go up, rental income must more than cover the mortgage interest. In addition, many buy-to-let lenders demand that prospective borrowers have an independent income, usually from employment or pensions, to help support mortgage payments during any periods where there is no rent coming in.

Were Jim and Jennifer buying today, one of the cheapest deals available is a 1.79% fixed rate with Virgin Money until May 2020, with a £1,995 product fee. This means monthly interest payments of £226.72, including the fee, until May 2020, rising to £632.04 a month after.

The mortgage requires borrowers to have a minimum annual income of £25,000, which they meet with Jim’s fire service pension added in. The lender also requires projected rent to cover mortgage costs by 145%. So, rental income of £1,010 a month is required to cover an up to £632.04 monthly mortgage payment. This may be a bit of stretch for a £200,000 property in Ashford, but other, slightly more expensive lenders, have less strenuous stress tests.

To buy the property, Jim and Jennifer would also need a £50,000 deposit and another £4,000 in fees and stamp duty. To cover these costs, Jim could access his Aviva and L&G pensions at age 55, which should be worth around £50,000 by then.

If Jim took his 25% tax-free sum from his pensions, this would provide £12,500. The couple could then take £27,500 from their investment Isas and cash savings, leaving behind a £500 cash rainy day fund.

This would leave the couple £14,000 short, which could be funded by a further taxable withdrawal from Jim’s pensions, the indexation payment from the fire brigade pension, plus some additional saving they could do over the next 18 months.

However, Jim needs to take care that any additional withdrawals do not push him into a higher-rate tax band. He should also avoid dipping into his personal pensions, which can potentially be passed down the generations free of inheritance tax (IHT).

The couple should also bear in mind that from 2020, mortgage interest relief is only available for basic-rate taxpayers. So Jim and Jennifer should purchase their buy-to-let property in joint names to ensure that Jim’s total pension and rental income does not push him into the higher-rate tax band.

Jim comments:

“We had initially thought of buying a holiday home and it was from this idea that we came to think of buy to let. It’s a route we never thought of before, but it’s certainly one we’ll go down in two to four years’ time. We’ll add to our savings in the short term to help fund this.

“It’s a good way of protecting our capital, we’ll earn income in the short term, and if the worst comes to the worst the children could live there when they’re older.”

Buy NICs to top up fire service pension

Jim contracted out of his fire brigade pension for several years. His current state pension forecast predicts a state pension of £133.92 a week at age 67.

However, by paying just a further six years of national insurance contributions (NICs), funded through his work at Tesco, Jim could boost his state pension entitlement to £159.55 a week – the full state pension at the time of the makeover in the 2017/18 tax year. For the 2018/19 tax year, this rises to £164.35 a week.

Jim says:

“What really surprised me from getting a pension forecast is that I don’t have full NICs and that really hits your state pension – I’m missing out on £1,330 a year.

I have 38 years of NICs [35 years’ worth is needed to get the full state pension] – but I still don’t have full contributions as I contracted out. I wouldn’t have known this without the Money Makeover, so, it’s important to ensure you have the maximum NICs you can.

“I’m thinking of working part-time for another three years and then I’ll check where my state pension stands, and I will consider buying the missing years. I will also continue to contribute to my Tesco pension in the meantime. People say you can’t afford to pay into a pension – but when the company is paying in as well, you can’t afford not to.

I can then use this pension for the buy-to-let purchase and to buy state pension top-ups.”

Consider topping up life cover

Jim currently receives free life insurance from Tesco worth four times his salary. However, there is a case for Jim to take out further cover.

Life insurance of £200,000 to Jim’s state pension age of 67 would cost £33.97 a month with Aegon. Life cover should always be written into trust as this means it falls outside of the deceased’s estate for IHT purposes and can also be paid out without waiting for probate.

Plus, if Jim predeceases Jennifer, she will only receive 50% of Jim’s fire brigade pension. The death benefits on his other plans depend on how he chooses to take them at retirement – such as through an annuity (and if so what type) or drawdown. I’d make a case for drawdown as Jim has a high level of guaranteed income from both his state and fire brigade pensions.

Jim comments:

“Given our children aren’t completely independent, this is something we’ll be seriously thinking about.”

Set up lasting powers of attorney

The couple have mirror wills, but I always recommend setting up lasting powers of attorney (LPAs), especially for those taking any form of pension drawdown income.

Jim says:

“I agree with getting LPAs, so we’ll definitely do this.”

On the makeover as a whole,

Jim comments:

“I enjoyed the experience and found it useful. Simon made us look at things from a different perspective.

That’s what financial planning is about – there are several routes you can take and which one you choose will depend on your circumstances. I’m lucky as I paid off my mortgage at 50 and my fire brigade pension gives me flexibility.

“The makeover has also enabled me to think outside the box – we’d not thought of buy to let but it will be a good tool to diversify our portfolio and to earn an income from.”

Simon’s key recommendations for Jim and Jennifer:

  • Look into buy to let
  • Buy NICs to top up fire service pension
  • Consider topping up life cover
  • Set up lasting powers of attorney

None of the above should be regarded as advice.

It is general information based on a financial report conducted by Simon Webster of Facts & Figures Chartered Financial Planners in Kent.

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