The wonderful Mrs W.O. in Surrey

This client was initially referred to us after her husband died unexpectedly; she had two young children, the life insurance pay out and dependents’ pensions from her late husband’s employer.

The employer had provided pensions for the children whilst they remained dependent. Our client had given up her career to raise her family and had always left the money part of family life to her husband so was quite unsure of the what, where, how and how much.

What we did: firstly we mapped out the cashflow of her initial income. She had no mortgage, cash in the bank and family income from four different pension sources. On the cashflow map it was quite clear that in 8 to 12 years' time there would be a significant shortfall in income when the dependents’ pensions stopped due to the children finishing education.

  • We set up a monthly budget to guide her through having oversight and control of the family ‘accounts’ ( we set up budgets for many clients so this was very straightforward for us, and very helpful for her). It gave her a good understanding of how much ‘leeway’ she had in her accounts each month, each year and for holidays etc. Even now she still calls to ask how much she can afford on a new car, a new kitchen or a blow out family holiday.

We then organised an ISA for her which was fed with the capital she had received, and invested in low volatility stocks until she and we were all comfortable with the family’s new cost of living and cashflows. The ISA was set up to provide tax free income after 10-12 years.

Next we set up a general account to a) produce natural income, and b) generate capital gains to use her annual allowance. Here there is a mixture of investment trusts and household name preference stock.

Lastly we set up a bond contract with an ultra-dependable income.

Other than on her widow’s pension, this client has paid no income or capital gains tax on her portfolio since starting with us in 1999.

Mr. H. in the garden of England

This client was referred to us after he had received a bonus from work. At the time the client had old endowments that would eventually pay out, having been originally used for a dim and distant first house purchase. Being a recently divorced person our advice to him at the time was to pay off what mortgage had been left outstanding and then to set aside the balance of the money in a deposit account until he was clear about his future plans.

In his industry senior folk tended to move quite often, from employer to employer, and he also had the benefit of previous final salary schemes. In 2002 the client stopped his full time ‘trade’, although he continued to work away from the coal face, both in and out of London.

What we did: he had a deferred pension which we evaluated for him and advised him to retain. Part of this scheme had a money purchase element.

Several years later the client divorced, amicably, and we were asked to resolve the errors in an incorrectly calculated court order; this resulted in a new pension annex and the correct allocation of the money purchase money.

  • We did periodic assessments of this client’s pension, including arguing with the scheme trustees as to why their capitalisation figures had ‘scope for improvement’. In five years this increased by over 300%. The client was single so no widow’s benefits were needed to be priced in, nor did he have any children under 25 so no dependents’ benefits were needed.

At each annual update meeting we discuss his cash needs for the coming year and arrange where that income is to be sourced. He has now remarried, so we have started to drawdown on his Pension Commencement Lump Sum to provide tax free cash to top his current part time income. His conservative portfolio has produced 7.05% per annum returns after all charges against an initial target requirement of 4.3% so there is plenty of ‘fat’ in the SIPP, and the client is lucky to have protection from the Lifetime Allowance cap of £1.8m without which he would be facing a pension tax charge of up to £165,000.

The erudite, elegant whirlwind that is Mrs M.C. was referred to us with significant cash in the bank, and an investment account with a stockbroker.

As usual, we started with plotting out the budget to analyse precisely what her lifestyle was costing her so that we could then assess with accuracy what income was actually needed. The amount of income was then calculated as a net yield on the available capital which directed what risk was needed in the portfolio. There is often a mismatch here between the risk needed to produce the returns, and the risk the client is happy to take (or can afford to take).

What we did: We started with twelve months’ bank statements and used those to build ‘accounts’ for the previous year. Interestingly, what came to light was that the second biggest expenditure this client had was the income tax bill on the money from broker’s investment account.

We organised the client’s SIPP to be available to produce a mix of drawdown cash and some natural income after the client was old enough (post age 55). We also accounted for drawing down from her ISA to again produce untaxed money for several years.

  • Working with the broker we then moved half her investment account into a bond wrapper, with the broker still running her account, which will remove 2/3rds of her income tax expense each year from now – we calculated for her that paying some CGT at 20% now to save 40% income tax was beneficial over the years. Although this client now affords an enviable country lifestyle, most of her taxable income now falls within her tax free personal allowance and she has very little tax to pay.

We plotted out the client's cashflow for each of the next seven years with all her assets available to 'provide' cash. Now with confidence she was able to see exactly how much monthly income was needed as opposed to how much was sent from her broking account. We calculated the sum needed to complement her brokerage income and set three years' income in cash, on deposit at her bank, with a monthly standing order to provide her with a regular monthly 'income' alonside the broker money.

The other half of the broker amount is untouched in a bond contract, at a very low cost, holding income producing assets where the income will grow over time. The cash at her bank will earn virtually nothing just now, but rates will slowly start to come back. Holding cash at the bank enables her to use the bulk of her money to buy assets with increasing income so that when that income tap is eventually turned on, the income rate should be materially higher than cash, and, with proper planning, she should be able to avoid almost all income tax from her investments over coming years. 

The busy Mr B.I. and family

This client has been with our firm since he was first starting out in business. An astute operator, he built his firm quickly and profitably, which meant that he and his wife have been able to accumulate material sums in a company pension scheme, and in their ISAs.

For several years the planning process was not really relevant as the focus was simply on accumulating money in the most tax efficient way from his business. Once past 40, and with the first child at university, the options of an early retirement came to the fore.

What we did: the cashflow planning for this client's family was different to the norm as we we were plotting a start date for investment income some time in the future with one big variable: to sell or not to sell the business, that is the big question - is it better to hire a manager for the firm and continue to draw income, or sell and take the cash? We modelled various scenarios.

  • Being honest, this client was never entirely comfortable with investments handled by someone else; he is a very successful businessman in his own right, and he's achieved his wealth by driving income and cutting costs, so he always questioned what we were doing, analysed fees, compared his returns to 'other people's'. 
  • This emotional tension stopped when we ran through his cashflow scenarios, his lifetime income plans. What happened was that he suddenly saw his financial life in a visual representation that gave him the reassurance that in almost every scenario we drafted his family would not run out of money.

The process was nailed when we assessed a cash value for his business if he were to sell at age 50, as the minimum base line: taking the sale proceeds into account, and calculating the costs of their lifestyle - including the large European second property - he could see that he only needed a 4% annual return on his pension and ISA investments from now, to be able to deliver the required income. The task was to deliver reliable returns, without unnecessary risk to capital, so first the return has to be quantified - once done, the client could understand how we generate his returns, and why we pick the various investments for their portfolios - it all made sense to them.

Given that the 2017 FTSE100 dividend was around 3.5% neither he, nor we, were overly concerned, and this client family is now very relaxed about the future. Indeed the biggest problems now are how to start distributing money the adult children to help them buy their own homes, and to start chipping away at the inevitable inheritance tax many, many years in the future. 

This client no longer has any interest in returns other folk talk about, what the media writes about, as he has his own personal investment benchmark to meet his family's own lifestyle needs and he understands how his profits are being made and what his income will be.