Overview
Chris and Janet had sold their successful business in 2013 and were planning for their retirement. They were tied in to work for the new owners for at least a year, after which they wanted to relocate to the countryside to enjoy their retirement. At 56 and 47, they would be young retirees, with a long retirement ahead of them.
Their main objective was to invest the proceeds from the sale of their business (approx. £1.15million once they had paid their tax bills) for the rest of their lives to supplement their income from their pension funds (approx. £250,000 between them). Janet also had a small deferred pension from a previous employment, but this wouldn’t be payable until she reached 60.
They were fully prepared to spend all of their capital over their lifetimes, but of course, wanted to make sure they didn’t run out of money too early, especially as Janet was younger than Chris. Inheritance Tax planning therefore wasn’t a priority to them and indeed all Chris wanted to leave behind was a “smoking pair of boots”!
Their main concern
They had seen a new property that they wanted to buy and needed to set aside £200,000 for renovations and improvements. They would fund the purchase of the new property from selling their home in Derbyshire, plus another £100,000 paid from the buyers of their business after completed their year’s employment.
The had estimated that they would need £4,000-£5,000 per month to maintain their lifestyle and would have no income once their 12-month employment ended. They were concerned whether their capital would last long enough at that rate of spending, particularly as they were always going to need to top-up their income by £30,000-£36,000 per year (even when their State Pensions became payable).
Our main advice
- We recommended ‘ring-fencing’ £200,000 in accessible cash deposits to fund the renovations for the new property and setting up ‘tranches’ of investment to meet their ‘short-term’ (the next 5 years), ‘medium-term’ (5-10 years) and ‘longer-term’ (10 years+) requirements.
- The idea being to ensure they always had enough accessible cash to use as an income from the ‘short-term’ tranche, that could be topped-up from time to time from the ‘medium-term’ tranche, which in turn would be topped-up from the ‘longer-term’ tranche. This should minimise the risk of having to sell longer-term ‘growth’ assets at a bad time e.g. a sudden fall in values such as in early 2020 when Covid-19 rattled share markets.
What we did
- We arranged the new investments (and their pension funds) via an Investment Platform, to simplify the administration and reduce costs for the initial investments and any changes we would recommend in the future.
- The ‘short-term’ tranche would be kept in cash deposit accounts of various fixed terms to maximise the interest payable whilst ensuring they had access to cash when they needed it. We recommended £250,000 be set aside, to cover the next 5 years’ worth of potential spending.
- The ‘medium-term’ tranche would be invested into ‘defensive’ assets such as Government and high-quality Corporate Bonds, to try and provide better returns than cash and inflation, whilst providing a pot to top up their cash from that had a much lower risk of a sudden fall in value than shares and other ‘growth’ assets. We recommended a further £250,000 be set aside for this purpose, with the intention of the investments being in pace for at least 5 years. We recommended a mix of UK and Global Bonds of various maturity dates, to provide sufficient diversification and reduce overall risk.
- The ‘longer-term’ tranche would be invested into ‘growth’ assets such as Company Shares, Commodities and UK Commercial Property (i.e. ‘real’ assets), to try and provide much higher returns than cash and inflation. The objective was to try and replace as much of what would be spent from the short and medium-term tranches as possible through growth on this tranche. We recommended the remaining £700,000 of their capital (which included their personal pension funds) be set aside for this purpose, with the intention of the investments being in pace for at least 10 years, after which it would be used to top-up the medium-term tranche. We recommended a mix of UK and Global Share funds, Commodity funds and some UK Commercial to provide sufficient diversification and reduce risk, to match their attitudes to investment risk.
- We also produced cashflow modelling reports to give them confidence that their overall objectives could be met, with careful planning and a fairly tight rein on spending.
- We produce twice-yearly reports and hold twice-yearly review meetings with Chris & Janet look at the performance of their investments and pension funds and recommend any changes we feel would benefit their portfolios.
- We also update the cashflow modelling each year to see whether the original projections have changed and review their cash position and whether any monies need to be moved between tranches.
What were the benefits
- Chris and Janet have the peace of mind of knowing that their retirement plans are benefiting from a structured approach to the investment of their capital, which is invested in line with their own objectives and timescales and within defined risk parameters.
- They also have the peace of mind of knowing that we review the cashflow modelling forecasts at least annually, which shows them how long their capital should last. At the latest review, their capital is projected to last until Janet reaches age 98.
- Our ongoing advice and reviews mean that any changes to their circumstances, objectives, attitude to investment risk or the economic outlook are considered and changes to the investments are made when appropriate.
