Jonathan Orchard CFP^CM helps a couple to see whether they can retire from running a business after health issues and instead spend their time on holidays and finding the husband's dream car.
It was a pleasure to work with Andrew and Carol to help them understand the true value of their wealth and what it meant to them. When speaking to Andrew it was clear that he was very dedicated to his company and thoroughly enjoyed his job.
However after the shock and strain of his wife's illnesses their attitude to life had begun to change; they realised that time together was not infinite.
The uncertainty of the future and the balancing of the need to live a fulfilling life in the moment while still being mindful of the purse strings is a something that many people can struggle to understand but this was certainly at the forefront of Andrew's and Carol's minds when I met them.
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Andrew was quite typical of many business owners that I meet in that he had focused on developing and maintaining his business over the years but perhaps had not had the time to take a step back to understand where his business fitted into his longer-term financial requirements.
There was clearly value in his company but he did not quite understand how this could be converted into long term financial independence once he was no longer taking any remuneration from the company.
He did have a Sipp which owned the commercial premises of the company and due to the rental income over time had accumulated a significant cash balance.
He also had accumulated cash personally and realised that this perhaps over the longer term was not prudent and could affect their wealth due to inflationary pressures but he just did not like the thought of investing any of his money.
 Andrew was slightly worried about retirement as while he was looking forward to spending more time with his wife and family he was concerned about the sudden dramatic change in his lifestyle.
He did not have many hobbies due to his work commitments and was afraid that he might "lose his purpose" or become restless. They had both never been abroad before on holiday and while this seemed slightly daunting for them they very much wished to do something, although were mindful of the costs.
While initially Andrew and Carol were keen to focus on the technicalities on how to draw an income from the Sipp and how much they could take, I explained that before we looked at what income this Sipp (and other assets) could produce we needed to look at their wider affairs and in particular actually see how much income they needed now and into the future.
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It took some explaining to get them to understand the value of what a true financial plan and analysis could do for them as they had in the past been more used to focusing on just their pension and being "sold" investments. I think it became clear in Andrew's mind when I asked him whether he had a financial director in the company and whether they had a business plan which involved looking at company cashflow. He stated that this was the case and I began to explain to him the same reason a company looks into the future and plans is very similar to why we should do this on a personal level – this connection seemed to work.
At the end of our first meeting I gave them some "homework" which was to complete our expenditure questionnaire in as much detail as possible.
Being able to understand a client's current and future expenditure requirements is a crucial start to any financial plan and while it is easy for us to perhaps be provided with a broad expenditure figure, ultimately getting clients to understand the need to sit down and work through the numbers is far more rewarding and eye-opening.
After the completion of the questionnaire and subsequent discussions we arrived at an expenditure figure which they felt would be suitable to maintain their lifestyle.
We had also added in some additional expenditure for holidays and, at Andrew's request, a possible sports car purchase, although he thought this was more of a pipe dream. Once we had an idea of their longer-term expenditure requirements we began to get an idea of the capital and income required to maintain this.
At the same time we began to look at his company and how he would exit this. I explained that given his initial reservations about retirement perhaps he should consider gradually winding down so that retired life would not be such a sudden change of lifestyle for him. I said it would also give him the time to perhaps develop others interests and hobbies while spending more time with his wife earlier than planned. They both indeed liked the idea of this and we agreed that ideally, and if affordable, in a year's time he would like to work four days a week, perhaps gradually decreasing a day every annum.
While the company's success had initially been down to Andrew, he now had a strong and keen management team behind him. With various parties we began to explore the possibility of a management buy-out and subsequently the company was valued and figures started to be negotiated. However, the problem was that while the management were keen to continue the business they were concerned about the amount of capital required to buy-out Andrew and the impact of this on the company. Andrew was initially keen to receive an upfront capital payment only as he thought any other option could affect their financial situation.
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The buy-out was structured so that a smaller initial sum would be paid to Andrew now but Financial Planning can have reassuring results with the remaining capital due paid monthly over a period of five years to help company cashflow. This would be for an 80 per cent shareholding with the final 20 per cent shareholding being bought in five year's time. It was agreed that over this period Andrew would continue to work for the company albeit on a reducing basis which fitted perfectly with his plans to now gradually wind down.
Although Andrew had concerns initially about not receiving the capital all up front and the impact this could have on them personally, once we were able to start putting the value he would extract from the company into our lifetime cashflow forecast software (also taking into account his other assets such as the Sipp, personal cash holdings and state pensions) it soon became clear that structuring the buyout in this way had little repercussions for them – but was extremely welcomed by the company. In fact it was becoming clear that they were going to have a potential Inheritance Tax issue, something which they had not even considered.
While the potential Inheritance Tax was an issue Andrew and Carol were very relieved that they were going to have sufficient monies to enjoy themselves. Andrew was especially excited when I informed him that his dream of buying a sports car was possible and should not have an impact on their long-term financial wellbeing. As we tend to find when we start the Financial Planning process with most clients, Andrew and Carol wished they had looked at this earlier as it would have enabled them to be more confident about their money.
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As we now had a better understanding of their long-term wealth and requirements we were able to evaluate the potential impact of their large cash holdings over time. It became apparent that even when taking into account long-term inflationary pressures they did not need to take very much risk with their personal monies. This was a huge relief to Andrew as it took away the pressure of him fearing that he needed to invest a significant amount of his capital.
After getting Andrew and Carol to complete our risk assessment questionnaire and discussing the results with them it became clear why they were very cautious with their money. A previous bad investment property experience (where Andrew had lost his entire investment) had serious financial repercussions for them at the time and as such they were extremely nervous about any form of investment. Once I understood their psychological reasons for not wanting to invest it became much easier to understand their fears and help them to understand that not all investments come with the same risks. In fact when I asked them about the property investment they made it was clear that this was an extremely concentrated and highly geared venture. We discussed risk and return and that, ultimately, the level of return produced is dictated by the risk that you take with the monies.
We linked this back to their financial situation and I explained that they did not need to take very much risk at all with their monies to achieve financial independence. In fact they could have kept all their personal money in cash accepting that in real terms this would be eroded by inflation.
In the end after understanding how and why we invest client's monies and our investment process they were happy with an element of their wealth to be invested in a lower risk portfolio suited to their needs to give some inflationary protection – although they still would have large cash holdings as well.
We did decide however to take a little bit more risk within Andrew's Sipp in order to help provide for the pension income payments, however leaving enough cash for liquidity purposes and a future pension commencement lump sum – we will of course also need to consider the property investment over time.

What happened next
After their first holiday abroad, which they thoroughly enjoyed, they have now factored in at least two major holidays a year realising that this is affordable to them. Andrew is also a proud owner of his dream sports car and is now a member of his local golf club and is enjoying the challenges of a new hobby.
As with any Financial Planning process nothing stays static and we are continuing to look at Inheritance Tax and have so far put in place some planning measures to protect their wealth accordingly.
It is clear each time I meet them at our regular review meetings that they have a renewed zest for life but with the peace of mind that they can continue doing the things that they want to.
Now more than ever they understand what their wealth can do for them whilst savouring the time together and the new experiences shared – that is the true power of Financial Planning.