Financial Advise with case study
The Williams Family
Background
William and Jennifer Williams live in the North East of England. They own a property valued around £450,000 and this is owned as a beneficial joint tenancy. They have been married for 22 years and have had no children together. William has one 29-year-old daughter, Helen, from a previous marriage. Helen currently lives with William’s ex-wife.
William is 58 and in good health. He previously married at 21 but then divorced at 35, when he met Jennifer. He had a clean-break settlement in his divorce and his ex-wife has no claim on his finances.
William’s elderly mother lives 10 miles away in her own property in Newcastle. She is a widow and at 83 still lives on her own. The property owned by William’s mother is valued at £310,000 and her will leaves it to split equally between William and his sister Beverly.
Jennifer’s parents are younger. Jennifer is 53 and her parents are in their mid-seventies and live in the South East of England, some distance from Jennifer, who is their eldest child. They own a large house that has a current market value in the region of £1,550,000. They also have some jointly held investments amounting to £245,000 and ISAs of £74,000 each. On the first death, Jennifer’s parents would like to leave the remainder to the surviving partner (their property is jointly owned currently). On the second death they would like to leave as much of this as possible to Jennifer and her younger brother Steven. They are very keen that the “tax man should not have any of Jennifer and Steven’s inheritance” but do not know much about inheritance tax. They are aware they may have to pay tax but would like to mitigate this where possible. Jennifer’s brother Steven is married with one thirteen-year-old daughter Freya, Jennifer’s niece.
Employment and Pensions
William worked for a private company in the North East from the age of 16 to 35, Then he was made redundant. During his employment, he contributed to a defined benefit pension scheme. He has accrued 19 years of pensionable service and is due to receive his full pension benefits from April 2024, when he will be 60. His latest statement indicated his annual pension at that time is estimated to be £15,240. This figure will increase in line with inflation. The total transfer value of his pension, should he want to transfer his pension to a defined contribution scheme is £700,000. He no longer contributes to this scheme.
William now works for the National Health Service with an annual salary of £25,750. He contributes to a public sector defined benefit scheme paying 8.3% of pay into the scheme each month. Based on benefits accrued to date, his latest statement predicted an annual pension of £5,500 plus a tax-free compulsory lump sum of three times this amount. This is also payable in full when he is 60 and will rise with inflation. William does not anticipate that his salary will change significantly between now and when he intends to retire at 60 and therefore for the purposes of planning for retirement, he bases any plans on these figures. William is keen to retire as soon as financially possible. William’s death in service benefit (life assurance) is £66,500 and a survivor pension would be payable to Jennifer in this event.
Jennifer is an academic at a local University with an annual salary of £56,800. She has two pension schemes. She is a member of the Teacher’s Pension Scheme (a defined benefit scheme) and contributes 10.2% of her salary each month. She is unsure how much her annual pension will be when she decides to draw it but knows that there is an online calculator which she can use to help her with her planning. She is aware that she has options in relation to the age she can retire from education and the size of the lump sum relative to the annual pension she can choose to take. Currently, she has built up 15 years of contributions in the scheme from when she started her job at the university to now. Her full teacher’s pension is payable at 67 but the scheme allows members to retire earlier than this, but this has consequences to the pension payable. She thinks that her pension provides for William in the event of her death but is not quite sure. Jennifer particularly wants to know what her potential pension and lump sum would be at 60 and 67. She loves her job but does not want to be too old when she retires, especially as William is older than her.
Jennifer also has a private defined contribution pension. The total fund value is currently £88,760. She has not contributed to this scheme for many years but still receives her annual statement showing how the fund has grown. By the age of 65, this fund is forecast to be able to buy an annual annuity of around £3,500 per annum. Jennifer is a bit disappointed with this value. She would like to know if there are any alternatives to having to draw an annuity.
Both William and Jennifer are due to receive a full state pension at the age of 67.
William and Jennifer have heard about the 2015 pension freedoms in the media. They have discussed how it would be useful to access their pension funds for various purposes, including paying off the remainder of their mortgage and other debts. They have heard that the reforms allow individuals to access their pensions at 55 but do not know much else about the changes or which types of pensions they relate to. William has heard that it is possible to transfer his defined benefit schemes to a defined contribution scheme to take advantage of the reforms potentially allowing him to retire even earlier than he intends to. He has also heard that there are some disadvantages of doing so, therefore he seeks clarity on this.
Property and other assets
William and Jennifer have a joint repayment mortgage with Santander that they took out years ago. The current outstanding balance is £13,000 with around one year until the total sum is fully repaid. They currently repay £950 per month.
They have contents and buildings insurance but have no other insurance policies, other than those already mentioned and car insurance on their two cars.
Jennifer owns a small house in Scotland. She bought the house at the end of July 1995 for £75,000 paying purchase costs of £2,500. She lived in it for 5 years as her main residence but then moved away. Since then, she has used it as a holiday home and often lets friends use it free of charge. She has recently put it up for sale for an asking price of £375,000 (with predicted costs of sale of £1,900).
Jennifer also has a valuable antique that she was bequeathed by her grandparents that she intends to sell at auction this year. The probate value was £14,000 and she has been advised by an expert that it is now worth £42,000 and she hopes to realise this. Jennifer does not know if she will have to pay tax on these disposals but would like to find out about any ways in which this tax liability could be minimised.
Once both assets have been sold, she wants to use some of the money to build a fund to help provide a university education for her niece Freya, as well as to help her with a small house deposit to buy a property in the future. She wishes to earmark £60,000 for this purpose.
Jennifer would like to invest this £60,000 and any remaining proceeds of the asset disposals not used for other purposes in a portfolio of investments to grow her money. She is happy to take on some risk but wants to make sure that the £60,000 earmarked for Freya is safe. She does not want to have to do much to manage the portfolio, as she is very busy.
William was left £15,000 by his grandfather, when he passed away eight years ago. This is invested into £9,000 premium bonds, £3,500 cash ISA and the remainder in a savings account with a local building society. Jennifer has suggested he invests in something that will give a better return, but William is inherently risk averse. He has however thought that he may be willing to take on a little more risk. He would therefore be open to suggestions as to how he could invest this, and any other money he may have from other sources.
Estate planning
William and Jennifer currently do not have a will. Both would like each other to inherit their assets when they die and have assumed this will happen. After both deaths, they would like Helen and Freya to be provided for equally. They are not sure if they need a will, and both admit to knowing very little about them or the consequences of dying intestate. They are also concerned on the impact of ill-heath and making sure that if they are unwell, the other can make decisions for them.
Helen
William’s daughter Helen currently lives with her mother. She has been saving for a deposit on a property so that she can move out and live independently. She is not sure on how to proceed. She has saved £12,000 with the help of grandparents to date. Her gross salary is £29,000 per annum.
Other Liabilities
William and Jennifer have a car loan with a balance outstanding of £6,500. This is due to be fully paid up in 3 years’ time. They currently pay £300 per month. Jennifer has £8,500 on a credit card. She only pays the minimum balance off this each month (approximately £200).
Income and expenditure
William and Jennifer do not wish to substantially change their lifestyle. They do not have surplus income at the present time as like to holiday often and eat out frequently.
Assessment Tasks
Write a financial plan in the form of a client report (2500 words) for the Williams family that covers the following:
Base this plan on what you have learnt in this module and your own research. You should ensure that the plan is coherent and well communicated to the couple.
It should include:
Financial advice for the couple to include:
A statement of the couple’s objectives over the short, medium, and long term.
An assessment of the couple’s assets and liabilities and, based on your advice, how these will change between now and retirement (exclude potential inheritances from this assessment).
Forecast annual income and expenditure between now and retirement based on your financial advice. Prepare two alternative scenarios: Jennifer retiring at 60 and Jennifer retiring at 67 (William retiring at 60 in both cases). You may use excel and copy into the report as appendices.
Calculate the current net pay of William and Jennifer. Use the information in the case and appropriate assumptions to support your forecasts. 16 marks
Specific advice regarding the 2014/15 pension reforms. You should make clear to the couple to which pensions they are relevant and what options the couple have as a result. You must provide specific recommendations for William as to the final salary scheme transfer, including the advantages and disadvantages of transferring his defined benefit scheme to a defined contribution scheme.
8 marks
Advice regarding all issues mentioned in the case study in relation to capital gains and inheritance taxation and estate planning. Your answer should include a calculation of the Capital Gains Tax (CGT) liability if Jennifer disposes of both assets in the current tax year. You should give advice as to how this could be mitigated and demonstrate how much tax could be saved with these measures. You should also calculate the potential Inheritance Tax (IHT) liability due on William and Jennifer’s parents’ estates and advise how this could be mitigated. You are expected to use 2022/23 tax year for your calculations. (You should assume that Jennifer has owned the property for 28 years in your calculations). State any other assumptions you make. 14 marks
Based upon the couple’s risk profile, recommend two separate investment portfolios for William and Jennifer. You should consider the funds available, clearly showing where these funds have come from. You should also attempt to model the performance of the portfolio between now and retirement. 14 marks
Provide mortgage advice to Helen. You should identify appropriate mortgage options and comment on their affordability as well as advising Helen about other costs (both one off and continuing) of buying a property. You should calculate Helen’s net pay and suggest a possible monthly budget that may help Helen manage her money in the first year of owning a property.
8 Marks
You should state any assumptions that you make, but you need to ensure these are from robust sources. You need to identify any information that you would need to seek clarification on from William and Jennifer. You are the financial advisor, and you should treat the information in the case as if it has been gathered from a first client meeting. Additional information and calculations should be included as appendices. However, these must relate specifically to the case study and support the financial plan you produce. Appendices or tables are not included in the word count.
You must base any calculations on the 2022/23 tax year.
You should write to the client in the report. You need to ensure that any sources are referenced in text and at the end in a reference list. You should use appropriate sections and clearly show this in a table of contents at the start of the report.
Total 60 marks
