Real life case study: Bill Saunders of Acumen Financial Planning

Financial Planner Bill Saunders CFP^TM Chartered MCSI deals with the case of a Chartered Mechanical Engineer who lost his job when the oil price collapsed and was left with little prospect of finding a new job.

Case study brief

Alastair, 62 and Sandra, aged 59 have been clients of Acumen Financial Planning for many years. They are married and have two grown up children, and three grandchildren. Sandra had been a teacher for most of her working life, while Alastair contracted out his services as a process engineer to the oil and gas sector. He did this through his own limited company, in which both he and Sandra held shares.
In this respect, he is typical of many of Acumen Financial Planning’s clients.

The past 10 years had been the making of Alastair and Sandra in a financial sense. When they first came to us in 2005, Sandra’s main asset was many years membership of the teachers’ superannuation scheme.
Alastair had a small defined benefit pension from his time as an officer in the Merchant Navy and a small personal pension. They owned their own home but there was still a fairly large mortgage.

This is a real life case study.
 Names and some other details have been changed to protect confidentiality.

The case study

For the 10 years prior to 2015, Alastair had been able to take advantage of a very favourable local economy in Aberdeen, and was commanding almost £1,000 per day for his services.

He had taken our advice at all stages, having his company build up his pension pot to around £400,000, as well as retaining some £500,000 in the company. Early on in the life of the company, Alastair and Sandra had decided that they would like to invest some of the company’s cash, rather than having it languishing in a company bank account earning little or no interest.

So, for many years they had been paying between £2,000 and £5,000 per month into a company owned offshore bond, on top of regular pension contributions. This strategy of drip feeding funds into the markets had resulted in significant investment gains over the years, even when including the significant stockmarket falls in 2007-2008.

In the case of both the pension and offshore bond, they had followed our advice on how the funds should be invested. Acumen Financial Planning believes that markets are efficient and that clients will be rewarded over the long term by simply participating in what the market produces, while at the same time keeping investment costs to a minimum. This approach, combined with an annual rebalancing of their portfolios had produced excellent result for Alastair and Sandra.

Early on, we had explained to Alastair that having his company make pension contributions made sense on several levels; a tax deductible expense for the company, extracting funds tax efficiently from the company into a fund in his own name, and the prospect of good returns over the medium to long term. In later years as pension legislation changed, this proved to be an even better move. For example, Alastair will now be able to draw down on his pension without restriction and everything that he and his wife do not manage to spend during their lifetimes, can be passed down to their children tax efficiently.

The offshore bond as a company investment also made sense; tax free growth while the bond is held, the ability to rebalance without tax consequences, the probability of better returns than the bank, and liquidity if needed.

While Alastair and Sandra had been careful to limit their drawings from the company to ensure they did not err into higher rate tax, they had still managed to pay off their mortgage in the intervening years.

The year 2015 saw Alastair reach the age of 62, while Sandra was 59 and things had changed since their last annual review with us. Due to changes in the profession, and the demands now put on teachers Sandra was no longer enjoying the job she had loved for over 30 years. She still loved teaching itself, and the interaction with the children, but “everything else” had changed and not for the better in Sandra’s opinion.

In Alastair’s case, the downturn in the oil and gas sector was now really beginning to bite. Having witnessed many of his colleagues being laid off, he had himself suffered cuts in his day rate amounting to almost 25 per cent. Now, he had been told that due to the cancellation of large offshore project, his own contract had been terminated immediately. With new contracts in the oil industry like hen’s teeth, the prospects for finding anything else were slim.

At the centre of Acumen Financial Planning’s service to clients is a lifetime financial model, and at their two previous annual reviews, we had demonstrated that they could both stop working immediately if they wanted to. However, until now neither of them had quite felt ready emotionally to stop work completely – that had now changed, and their 2015 planning meeting took on added significance.

Ahead of the meeting, we had asked them as usual to complete a detailed expenditure questionnaire. We try to ensure that clients take this seriously, because there is a real danger with financial modelling of “rubbish in, rubbish out”. With our encouragement, Sandra had taken the time to download their last years’ worth of bank statements to a spreadsheet, and had carefully categorised expenditure.

As a couple they had also thought long and hard about how this could change, because if they did retire, they would want to spend more time and money on things that they really wanted to do. There was a “trip of a lifetime” planned to spend time with family in Australia, Alastair’s car really needed to be replaced, and over the course of the next few years, they planned major renovation of their home. Last but not least, for many years they had harboured the ambition to buy a property abroad and spend maybe six months a year there, to avoid the worst of the Scottish winter. However, by retiring earlier than planned, they thought this was probably beyond them.

At Acumen Financial Planning we use large TV screens to demonstrate clients’ finances clearly through the use of spreadsheets and graphs. We carefully went through each aspect, including regular expenditure, predicted changes to this pattern, lump sums coming in and going out, all sources of current and future income, tax, inflation and fund growth. We find that clients who have spent time doing their homework ahead of the meeting really engage and ask plenty of questions.

They challenged me on various aspects – our assumptions on fund growth being one example, and we stress tested the model in various ways. Whichever way we looked at it though, the result was the same – they could both walk away from their jobs in complete confidence that they could afford to do everything they have so far expressed an interest in doing. We established that not only could they afford the property abroad, they could also give themselves an extra spend facility of £15,000 per annum for the first 10 years of retirement. This is unallocated spending and could be seen as fun money while they are still relatively young, fit and healthy enough to enjoy it.

In terms of strategy, there were a number of areas to consider and changes to be made. While they were both working, it made sense to allocate a relatively small percentage of the company’s shares to Sandra as she was earning at a level that took up most of her basic rate tax band. With them both retired, their incomes were roughly the same, so it made sense to split the shares evenly.

Furthermore, as Alastair was no longer working, it would not be necessary for him to take the relatively small salary from the company any longer. For many years, we had always planned to drip feed dividends out of their company over a number of years. The alternative would be to ask HMRC for an opinion on whether they would qualify for entrepreneur’s relief on company wind-up, but we felt this was unlikely to be forthcoming due to the existence of company investments.

The drip feeding route suited them perfectly in any case, but of course with much of the company assets invested in the offshore bond, we needed to revisit the asset allocation. Typically, we are constantly looking two to three years ahead and looking to ensure that there are sufficient lower risk assets available over that period, so in turn we are never selling equities at the wrong time. We try to educate our clients to understand the difference between investment risk and volatility. The latter is simply information on a website or a fund factsheet – it only becomes a loss if an investor is forced to sell at the wrong time.

We also held a discussion at the planning meeting regarding Alastair’s pension. The plan is to use the company assets up first and these should last approximately seven years. At that point we anticipate accessing the available tax free cash and drawing down carefully on the pension, ensuring that Alastair’s total income remains within basic rate tax. The rate of drawdown will be relatively modest as by then, Alastair will be in receipt of his Merchant Navy pension, and both he and Sandra will be receiving their state pensions.

Because we are some seven years away from accessing the pension, we agreed to leave the asset allocation as it is for now, with a modest bias towards equities. We did, however, revisit the Expression of Wishes nomination in light of the latest pension legislation, so that both their children are included as possible beneficiaries alongside Sandra. This in turn led to a brief discussion about Inheritance Tax – there is an exposure, but they do not regard this as an immediate priority. This will be revisited at future reviews, with financial modelling playing an essential role in determining strategy.

What happened next

It is not an exaggeration to say that Alastair and Sandra left our meeting completely elated. Although we had been telling them for a couple of years that they could retire if they wanted to, they felt the time was right and were finally prepared to believe us! They now tell me they have no financial concerns about their future and feel free to live the life they really want to. Ten years ago, they would never have imagined they would have been in this position. In fact, even two years ago they tell me that they imagined having to work for a good few years to come, whether they wanted to or not.

As a Financial Planner it doesn’t get much better than this – giving clients years of their life back, to live life exactly how they want to. Alastair and Sandra now spend their time equally between their home in north east Scotland and their new “second home” in Portugal, where they hope their children and grandchildren will be frequent visitors.

Key points

1 - In the context of financial modelling, avoid the trap of “rubbish in rubbish
out.” Insist that clients spend time quantifying and categorising expenditure. Recommend that they download
bank statements to a spreadsheet.

2 - Future investment returns are unknown, but current taxation is not. In particular, for clients who have their own business, so much of the value we can add as planners comes from really understanding
the interaction
 between company and personal finances.

3 - Stress test financial modelling and encourage clients to ask as many “what ifs” as they can possibly think of.