Andrea Key Facts Flashcards
Personal
• Andrea is aged 64, recently divorced with two sons and four grandchildren
• She is in good health.
• Her objectives are to generate a sustainable income in retirement and improve her current financial arrangements including those received from Carl as part of the divorce settlement.
• The potentially short timescale to retirement will need to be considered when assessing a suitable investment strategy.
• As Andrea is recently divorced, she may be classed as a vulnerable client even though she is adjusting well to her new circumstances.
• We need to know the details of her family/their health and any financial dependency.
• Potentially she may also wish to assist her family financially. This is not a stated aim, but it is something an adviser would need to establish.
Income employment
• Andrea is in full time employment and works as a manager in a marketing company and earns £56,000 per annum.
• We will require details of her current expenditure and expected expenditure in retirement as this detail is not provided
• We will also require details of her future employment plans. How long does she plan to stay in full-time employment, and does she plan to phase her retirement?
• Andrea is a higher-rate taxpayer. This means she has a PSA of £500.
Protection
• Andrea is a member of her employer’s death in service/pays 3 x basic salary on death.
• She is currently a member of Carl’s group PM scheme this cover is due to cease when the divorce is finalised.
• Andrea’s employer offers access to a Group PMI scheme, but she has not joined in the past due to the cover through Carl’s employer.
• has no mortgage and does not appear to have any other debts/liabilities.
• Andrea’s DIS benefits will lapse on her retirement or leaving
• employment/there does not seem to be any need to replace Andrea’s Dis as she has no apparent debts/financial dependants and has significant assets.
• If Andrea joins her employer’s Group
PMI scheme she will be taxed on the taxable value of the PMI as a benefit-in-kind.
• She has no CIC or IP, however protection needs do not appear to be a necessity and they are not one of her stated aims. We should however establish her views in this area plus the loss of Carl’s Group PMI.
• It appears the divorce was settled by
‘offsetting’ Carl’s pension against other assets to enable a clean break. It is important that Andrea updates the nomination form’on her pension and DIS.
Pensions
• Andrea contributes 5% of her gross salary to her workplace pension, this is matched by her employer.
• Her pension fund is valued at
£340,000 and is invested in a range of
UK and global equity funds.
Her State Pension entitlement is not stated.
• Pensions are a key focus for Andrea.
She should maximise the tax advantages that pensions offer before retirement. Her current pension provision is likely to be insufficient and funds do not match her ATR.
• Andrea’s contributions are £2,800 and her employer’s likewise. She appears to have plenty of scope to make further contributions.
• Increasing pension contributions can reduce her tax status to basic-rate which would increase her PSA to £1,000 and she can receive 40% tax relief on contributions. Pension benefits are outside of the estate so will help with her IHT liability and can be passed onto her sons (tax free before age 75).
• Use of salary sacrifice should be considered if her employer offers it.
We will not need to consider carry forward as tax relievable contributions are restricted to her salary of £56,000.
• Her State Pension entitlement is unknown even though it is due at age
66. She should request a BR19 to establish how much she will receive and if she has any gaps in her NICs history. She might want to consider the option to defer her State Pension if she plans to continue working past age 66.
• As Andrea is 64 it will be worth considering her vesting plans and options including her thoughts on flexible versus secured income.
Assets/savings and investments
• Total of £180,000 held in cash.
• 585s ISAs worth £115,000 in UK equity tracker funds/held on a low-cost platform.
• OEICs worth £130,000 in UK & global equity tracker funds and UK corporate bond funds.
• Individual shares in pharmaceutical companies worth £95,000.
• Her home is worth £500,000
• Andrea has a cautious attitude to risk (ATR).
• Following the divorce settlement, Andrea has significant personal wealth although it is not tax efficient and does not match her cautious ATR
• Her property is approximately 50% of her non-pension assets and has the potential to release funds to meet her retirement goals.
• She is overweight in cash/she has an excess emergency fund
• She will be paying tax on interest from the deposit account/she only has a £500 PSA/amount in deposit account exceeds FSCS limit of £85,000.
• We need details of the interest rates of her deposit and current account.
• She should be using her full pension and ISA allowances going forward to increase savings for retirement as the investments received from Carl are not as tax efficient.
• She is overweight in equities and individual shares for her cautious ATR/she is underweight in fixed interest assets.
• We need to know the dividend yield on the OEICs and shares/we need to consider the tax implications of the income from these assets and taxation on disposal.
• She holds ISAs on a low-cost platform so we will need to consider the suitability of her platform plus the option to add other investments to it to reduce admin/she is unhappy about the fund performance so we will need to review her ISA funds and suggest alternatives.
IHT/ Estate
• Andrea has an up-to-date Will leaving everything to her two sons.
• Total estate = £1,020,000.
• No apparent LPAs.
• Her Will appears to be up-to-date and suitable.
• No apparent powers of attorney (POAs). For client’s at or approaching retirement, it’s always worth a reminder about LPAs if they don’t have them.
• She currently has a significant IHT issue. Her NRB + RNRB = £500,000, therefore her IHT liability currently is 40% of £520,000 = 208,000 This is not a stated concern of Andrea’s as estate planning is not one of her stated aims, but it is something that should be considered
Strengths
• She has significant personal wealth.
• She does not have any liabilities/debts/mortgage.
• She has no apparent financial dependants.
• She has a good salary and there is no mention of job insecurity.
• She is likely to have surplus income from employment and savings income.
• She has sufficient emergency fund.
• She could downsize.
• She has an updated Will in place.
•. She has a reasonable pension fund with scope to increase further/can be passed to children tax free before age 75.
• She is in good health and adjusting well to life after divorce.
• She appears to have a clean break of the finances following divorce.
• She will have the option to take her
State Pension in approx. 2 years.
• She hilds ISAs on a low-cost platform.
• She can use DA and CGT AEA on OEICs and shares.
Weeknesses
• She has no income protection or critical illness cover. If she were unable to work over the next few years this could have implications for her retirement plans.
• She is now the sole earner.
• She may not fully understand her annual expenditure needs following her divorce.
• She holds too much cash/above FSCS limit/not tax efficient - taxed at 40% above PSA of £500.
• She holds too much in her current account which is likely earning very little if any interest.
• There is lack of diversification across her savings portfolio/mostly UK based/limited fixed-interest holdings/no commercial property.
• Her own home accounts for approximately half of non-pension wealth - concentration, illiquidity.
• There is a limited time period to fully fund retirement/her current pension funds are unlikely to be sufficient.
• There is no mention of LPAs.
• There is no mention of nominations being updated post-divorce.
• The PMI will cease shortly. Andrea will pay tax on premiums as a benefit in kind if taken out through her own employer.
• She currently has a significant IHT
liability of £208,000
• She will pay Income Tax on dividends above the DA and may have a CGT liability on the disposal of shares/OEICs.
Opportunities
• Maximise tax allowances;
• use of DA and CGT AEA on shares and OIECS:
• maximise pension contributions to increase PSA to £1, 000/40% tax relief;
• use maximum ISA allowance pa/bed and ISA shares/OEICs.
• Use other investments ie investment bonds, NS&l premium bonds.
• Rearrange portfolio for tax efficiency
• Consider higher interest options for deposit account funds.
• Possibility of transferring all assets to a platform.
• Diversify fund choices to suit retirement plans, to lower volatility and to match ATR.
• She could defer State Pension.
• Join new employer GPMI scheme.
• Set up POAs.
Threats
• Loss of income through ill health or redundancy.
• No POAs in place.
• Health/potential vulnerability in future.
• Impact of inflation, especially on her cash holdings.
• Loss of cash holdings if bank fails.
• Lower future interest rates, too much held in cash.
• Market downturn/underperformance of UK equities.
• Reduction in annuity rates.
• Changes to legislation/taxation.
• Reduction in real terms of Income Tax allowance/future planned changes to allowances/ reduction of CGT AEA & DA
• Pension benefits being passed to Carl instead of children on Andrea’s death.
Andreas breakdown of investments is
£180k in cash = 34%
£95k in individual shares = 18%
£190k in equities = 37%
£55k in fixed interests = 11%
£0 in property = 0%
Compare this to the recommended weighting for a cautious investor as set out by cii
Cash = 10%
Individual shares = not likely to be recommended
Equities = 50%
Fixed interest = 25%
Property = 15%
