Joshua & Amina Key Facts Flashcards
Their financial aims are to
• Review and improve their existing protection arrangements;
• Review the ongoing suitability of the company structure for Joshua’s business;
• Improve their current retirement savings provision
Personal information
• Joshua and Amina are married and have three children aged nine, seven and five.
• They are all in good health.
• They are both aged 36.
Notes
• Their personal circumstances appear relatively straightforward.
• We do not know if they plan to save for school fees/university fees for the children.
Income/employment
• Joshua is a builder who runs his own limited company, drawing a salary of £65,000. He draws no dividends.
Annual turnover is £90,000.
• Amina is a pharmacist, earning £49,000 per annum gross. She also receives company performance related bonuses and is due £5,000
next month.
• Amina is also company secretary for Joshua’s company.
• Amina is a shareholder but receives no salary or dividends from the company.
• Both are likely to be higher-rate taxpayers given Amina’s bonus.
• Joshua is considering closing the company and continuing to operate on a self-employed basis for ease of administration.
• One of their immediate objectives is to review the ongoing suitability of the company structure for Joshua’s business. The respective benefits of using a company versus self-employed will need to be considered.
• CGT business asset disposal relief may be available.
• The case study does not state whether
Joshua has any other employees, although this appears unlikely based on turnover and his own salary.
• Joshua’s remuneration is not tax efficient. He is a higher-rate taxpayer and is taking all salary in lieu of tax-efficient dividends.
• It is not clear whether he is drawing everything after expenses from the business or whether he is leaving some funds there.
• It is not clear what their personal expenditure is and hence whether he needs to draw as much as he is.
• His earnings exceed £60,000, even after his pension contributions, and hence they will not be entitled to any child benefit.
• Amina will be a higher-rate taxpayer if she receives her bonus in the current tax year.
• PSA is reduced to £500 for higher-rate taxpayers.
Protection
• Joshua and Amina have a joint life decreasing term policy to cover the mortgage.
• Amina is a member of her employer’s death-in-service scheme, which pays out 4 x basic salary on death.
• Joshua has no financial protection other than for the mortgage and there are no employee benefits set up via the company.
• Amina has no other evident employer health and sickness benefits.
• One of their immediate objectives is to review and improve their existing protection arrangements to ensure they are adequate to meet the family’s needs going forward.
• It is not clear whether the mortgage protection policy is set up on a first or second death basis.
• They have no protection to cover the family/loss of income in the event of either of their deaths.
• Amina’s death-in-service cover would stop if she left her employer.
• They have no critical illness cover.
• They have no protection to cover loss of earnings as a result of ill health. This is particularly important for Joshua as he is a builder and physical injury may render him unable to work.
• They could also consider PMI.
• Their level of savings and investments suggests sufficient surplus income to pay for cover.
Pensions
• Joshua has a company qualifying workplace scheme with a total value of £20,000. This is invested in a target date fund.
• Both he and the company make the minimum required contributions.
• Amina is a member of her employer’s qualifying workplace pension scheme, which is invested in a UK ethical equity fund.
• She and her employer are paying 6% matching contributions and the fund is valued at £58,000.
• State pension entitlements are not mentioned but there are some way off retirement at this stage.
• Both have limited pension provision, albeit plenty of time to rectify this.
• Amina’s pension appears suitable, invested in line with both her ESG interest and her risk profile, particularly given the long-term time horizon.
• Joshua’s pension is invested in a target date fund which may also be suitable, albeit the actual target date is not specified.
• Intended retirement dates are not specified.
• Joshua and the company are both paying the minimum contributions.
Minimum is 8% with 3% employer, so assuming paid in line with this he is paying 5%.
• There is scope to do this more tax efficiently by making the entire contribution as a company contribution.
• Amina may have scope to sacrifice her bonus in order to remain a basic-rate taxpayer. She may also have scope for further matched contributions.
• Unclear whether death benefit nominations have been made.
• Child benefit could be reinstated in full by reducing both their earnings below
£50,000 via pension contributions.
Assets/savings and investments
• Property valued at £360,000 with a £240,000 outstanding mortgage.
• £2,000 joint current account.
• £65,000 deposit savings account…
•Amina has a stocks and shares ISA valued at £75,000 invested in global ethical funds.
• Joshua has a stocks and shares ISA invested into a UK managed fund.
Both are medium-to-high risk investors.
• Amina has an interest in ESG investments, however, this is not a concern for Joshua.
• Amina’s assets are invested in line with her ESG views.
• They are likely to be paying tax on the savings income as it is likely to exceed their PSA of £500.
• Level of cash savings is significant;
they could consider investing some of this as they appear to have surplus income. This would also potentially allow scope for use of the CGT annual exempt amount/DA.
• However, this depends on regular expenditure and required emergency fund.
• The savings are seemingly immediately accessible since they are stated as deposit-based and no fixed term stated.
• We do not know if this year’s ISA
allowance has been used.
• They could potentially save tax by moving some of the savings into cash
ISAS.
• We do not know the asset allocation or sector split on the ISAs.
• Heavy exposure to the UK with Amina’s pension in a UK equity fund and Joshua’s ISA in a UK managed fund.
• Amina’s ESG focus may reduce diversification opportunities.
• No details of any expected inheritances.
IHT/Estate
• Mirror wills leaving everything to the survivor on first death and then to the children in the event of both deaths.
• Guardianship arrangements set out in the event of both deaths before the children turn 18.
• No reference to LPAs.
• The Wills and guardianship arrangements appear up-to-date and suitable.
• No apparent LPAs. Whilst this could be seen as not a priority given their ages, there is always the possibility of accidents etc
• No current IT issue, this is not stated as an objective and not likely to be a priority given their stage of life.
Mortgage
• They have a £240,000 outstanding mortgage on a repayment basis.
• The rate is fixed at 4.6% for the next 3 years.
• Monthly repayments and term not specified.
• The repayment appears affordable based on their level of cash savings.
Strengths
• They have a significant degree of income with basic earnings of
£114,000 before pension contributions and tax.
• They are not reliant on a single income.
• They have a healthy and easily accessible emergency fund.
• They have a reasonable level of investments given their age.
• They have mirror Wills in place.
• They have guardianship arrangements in place for the children.
• There is no evident liabilities other than their mortgage, which appears to be comfortably affordable.
• They have a long timescale and seemingly surplus income to fund their retirement.
• There are no current IHT issues, albeit not a short-term priority in any event.
• There is a known cost on their mortgage for 3 years.
Weaknesses
• No income protection or critical illness cover in case they were unable to work. No PMI.
• This is particularly important for Joshua, who is a builder and may not be able to work in the event of physical injury.
• No life cover, other than the mortgage protection policy and Amina’s employer death-in-service plan, which will cease if she leaves the employer.
• Both are likely to be higher-rate taxpayers with a reduced personal savings allowance of £500.
• They have three young dependants.
• No use of CGT annual exempt amount or DA.
• Significant mortgage liability.
• Cash ISAs are more tax efficient than deposit accounts - unclear if this year’s ISA allowance has been used.
• Relatively low CFL.
• Liable to the Higher Income Child
Benefit charge.
• No LPAs in place.
• Significant exposure to the UK market with both Amina’s pension and Joshua’s ISA in wholly UK funds.
• Potentially surplus cash holdings.
Opportunities
• Joshua runs his own limited company and therefore has scope to run his affairs more tax efficiently.
• Potential for further investment given
• ATR and apparent surplus income.
Use of AEA and DA.
• Ongoing ISA use.
• Further pension contributions to reduce their tax rate to 20%.
• Diversifying investments away from the UK market.
• Set up employee benefits via the company if he chooses to retain it.
• Establish appropriate life and health cover either personally or via the business.
• Reduce his income/further pension contributions to reinstate Child Benefit.
• Claim tax-free Child Benefit.
• Increase pension contributions to claim full Child Benefit (£2,901 pa)
• Target date fund can have the date changed if required.
• Salary sacrifice.
• Opportunities for adventurous investments strategies given timescales and ATR.
Weaknesses
• Scope to operate tax efficiently may be restricted if he switches to self-employed status.
• Joshua is a builder and dependent on health.
• Amina’s ESG focus may reduce investment opportunities.
• Inflation impact on cash holdings.
• Impact of interest rate decrease on cash holdings.
• Impact of interest rate increase when the mortgage deal comes to an end in 3 years.
• Market downturn on high exposure to equities
• Reduction of tax allowances/freeze on personal allowance.
• Changes to legislation/taxation.
