case study brief

Peter was referred to us by his business partner, Richard, who had become a client around six months earlier and had really valued the Financial Planning process and experience. Alongside Richard, Peter runs a successful and rapidly expanding IT business and has settled into life with his new partner, Laura, following his Wife's sad passing a few years earlier. Peter and Laura are both in their early 50s and have relatively complex financial affairs and family circumstances.



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Peter is 10 years younger than Richard and was concerned to start thinking about his future and paying more attention to his personal finances, which, as it turned out, were quite strong in some areas yet quite weak in others. Laura was keen to understand her divorce-related final salary pension entitlements and was uncomfortable in feeling that she was not really contributing to the family's current and future financial success, given that Peter was the main breadwinner and had contributed the greater share of the family's assets.

Case Study

Peter and Laura completed the £1.5 million purchase of a large old property around eight months prior to our meeting in which they, Peter's two daughters, and Laura's two sons and daughter all now live harmoniously. In order to fund the purchase they had to borrow around £575,000 (split 75% interest only and 25% repayment) and given its age, it is very expensive to improve and maintain. Among their principal concerns were having a plan in place to repay the capital and the £26,000 of credit card liabilities they had incurred in the purchase process, as well as ensuring they had appropriate insurances in place to protect the family against catastrophe scenarios.



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Peter's business is on the cusp of signing a contract in the US which could lead to the size of the company doubling overnight, so these were both exciting and stressful times, given the amount of work which was going into securing the deal. With this in mind, as well as wishing to have extra money available each month to make life a little more comfortable - in part because so much was now going out on meeting the costs associated with the house - Peter wanted to gradually reduce the number of hours he worked, in order that he and Laura could spend more time doing the activities they enjoy, including eating out, going to the theatre and travelling.

On a longer-term basis, Laura would like to have the choice to work part-time from age 60, while Peter would like to be able to retire before he's 65 if possible and to be able to afford an "expensive and exciting car".

The main provisions for retirement for Laura were her own relatively small final salary scheme benefits and the more significant final salary scheme benefits of her ex-husband, while Peter had accumulated around £450,000 of very muddled pension funds which continued to receive notable ongoing employer contributions.

By coincidence, following my previous recommendation to Richard that a professional valuation for the business should be obtained, the week before our meeting Peter and Richard received their written report, which suggested a current minimum value of Peter's shares of £250,000, so this would prove helpful to our discussions. Of course, if the business really takes off over the next few years, the final valuation could be multiples of this.



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With regard to other family-related issues, Peter and Laura were very keen to assist their children in clearing or at least reducing their student loans over the coming years and they wanted to give consideration to how they might achieve their desired outcomes with regard to Estate Planning, given the relative complexity of their family circumstances.

At their planning meeting we tackled all of their major concerns and issues, including those, which they were not previously aware of. One such issue was that Peter and Laura had no real cash reserves, partly due to savings being used to assist in the property purchase, so from a risk management perspective, this needed to be addressed as a matter of some importance.

This sat alongside the fact that Peter had an old endowment which was due to mature in 13 months' time and which could be surrendered immediately without penalty. It was agreed that the surrender would take place on the basis that it would clear all of the outstanding credit card debt, create a cash reserve of around £18,000 / three months' worth of expenditure, would free up around £1,000 per month to help support other objectives and for Peter, as a higher rate taxpayer losing part of his personal allowance, would achieve a risk-free equivalent gross return of anything up to around 29% per annum, which would certainly not be delivered by the surrendered endowment.



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(The only caveat was that the endowment was not to be surrendered until any new life insurance plans were in place, as £75,000 of cover would be lost upon surrender and make Peter and Laura's currently under-insured position worse).

We discussed Richard's plan to retire over the next 18 months or so, including how Peter felt about this, what the likely impact would be on the company and how Peter might fund the purchase of Richard's shares. Pleasingly, quite a lot of thought had been put into the transition since I had spoken to Richard, as his workload was being transferred to other members of the existing team on a gradual basis and Peter was confident that this could continue successfully. In addition, Peter confirmed Richard's view that providing it was sensibly planned, there was sufficient cash in the business to comfortably fund Richard's exit. (Cross option agreements and suitable business protection policies were already in place as a result of our work with Richard).

Our conversation about business matters led us into current and future remuneration considerations. Unfortunately, Peter was not in a position to reduce his adjusted net income to below £100,000 and thus avoid losing some of his personal allowance and in fact, their plan indicated that additional income over the coming years would be very helpful / essential to achieving the future they desired, including their goals for retirement and repaying the mortgage by the end of its term or sooner.

With this in mind, I raised the prospect of Peter being able to pay himself increased dividends once he had acquired Richard's shares. We were able to determine approximately how much more Peter needed to earn in the way of gross dividends to have a good chance of making their goals a reality and it was agreed that this should be feasible, even if the business doesn't secure the large US contract. Of course, if the business really takes off matters could change considerably, including how soon Peter might be able to slow down a little, but we will be able to deal with any changes to circumstances and help Peter and Laura understand their impact as part of our ongoing work together.

Thinking a little further ahead, I raised the possibility that if Peter and Laura were to get married one day, Peter could consider making Laura a shareholder in the company without liability to Capital Gains Tax, such that she could take advantage of around £24,000 of her unused basic rate income tax band, which could save in excess of £5,000 pa in income tax. (I did, however, express my view that it might be best in the long-term if there were other reasons for getting married, which didn't relate to tax planning!)

During the course of our conversations, it transpired that Laura's mother sadly passed away a couple of months prior to our meeting and Laura was expecting to inherit around £60,000 from her estate. She was almost certain that she wanted to pass this straight to her three children with a view to helping them pay down their student debts and giving them a helping hand. I therefore suggested that consideration should be given to creating a Deed of Variation on her mother's will and arranging for her bequest to pass directly to the children, which would avoid the money forming part of Laura's estate and could save up to £24,000 in inheritance tax depending on when Laura passes away.



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I recommended that Peter and Laura should have up to date wills drafted, which reflect their current wishes and circumstances. These would include Discretionary Trusts, firstly to ensure that assets pass to the right people at the right time, secondly to make full use of Peter's expanded nil rate band and thirdly as a vehicle for the company shares with reference to making maximum use of Business Property Relief. I further suggested that a Benefit Preservation Trust should be established with immediate effect to receive the value of Peter's pension assets in the event of his premature death, with a view to mitigating a potential future Inheritance Tax liability of several hundred thousand pounds.

I explained to Laura the rules and relevant considerations around taking the final salary benefits that she is entitled to and by way of some context, explained that the cash equivalent value of her rights was somewhere in the order of £250,000 and as such, if this number were to appear on their Net Worth Statement, perhaps she would feel a little more comfortable that she is indeed contributing towards their financial future. Laura found this very reassuring and in fact, it made her rather happy, which I was very pleased about.

What happened next

We helped Peter and Laura establish appropriate insurances to protect the family against catastrophic scenarios as fully as possible. Given Peter and Laura's ages and the fact that Peter is a smoker, it was agreed that while desirable, an element of critical illness insurance would not be affordable initially. We therefore simply implemented a hybrid strategy of decreasing and level-term assurance policies in respect of the mortgage debt and ensured Peter had the most appropriate Income Protection Insurance in place possible through the business. Finally, we re-organised Peter's pension assets so that they were better structured, less expensive and more appropriate with regard to the three tenets of investment risk.

Peter and Laura confirmed that they found the Financial Planning process very enlightening and that they now feel much more organised, secure, clear and confident about their future. They also feel reassured that they have a partner who will continue to help them to navigate their way through their financial complexities and get them as close as possible to the life they want.



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Key Points

• There were several areas of weakness in Peter and Laura's personal finances which needed addressing, including a lack of cash, a high level of indebtedness and a dangerous lack of financial protection for the family.
• Complex financial and personal circumstances meant that complex tax planning was required, but which could in turn deliver very significant benefits for the family.
• Peter and Laura really needed to improve their understanding of their current financial reality and what needed to happen in order that they could achieve and maintain their desired lifestyle indefinitely. They also needed a boost to their financial clarity and confidence and a framework for making consistently good decisions moving forward.

Bio

Michael holds the globally recognised Certified Financial Planner qualification, as well as being a Chartered Financial Planner and Fellow of the Personal Finance Society.

Michael started his business at age 25 and this enabled him to combine his passion for proper Financial Planning with a desire to help bring about real and lasting change in the way financial advice is delivered in the UK.

Away from work, Michael enjoys reading, travel and sport and loves spending time with his wife and young daughter.

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