Thomas and Thomas' Darren Lloyd Thomas CFP^CM reflects on a couple approaching retirement who had a lack of organisation and needed a "second opinion" on their finances.
In the autumn I was contacted by one of our existing clients' sons, Mr Jones. I have looked after Mr Jones' mum for the past seven years. He asked me for "a second opinion" on his existing financial arrangements.
Mr Jones (age 59) is a senior employee in a local company, currently earning around £40,000 per annum. He explained that he wished to retire in two years' time. He has no company pension. He held around £161,000 in a full Sipp arrangement, invested 100 per cent in cash receiving 0.12 per cent pa, and a further £120,000 in property Sipp arrangements – awaiting sale.
He held around £120,000 in bank savings accounts and fixed term cash bonds jointly with his wife. Finally they held around £127,000 in various Isa investments between them – held in many different companies. So in total they had around £528,000 in assets for their retirement.

Mr Jones was still working with old pension illustrations. This led him to assume that he could expect around £30,000 per year
in retirement from his pension and investment arrangements.
We ran the numbers together and quite quickly my new client paled as he realised this figure would require some pretty strong investment returns. I pointed out the impossibility of this – given his large exposure to cash. Mr Jones was concerned by the lack of organisation within his investments.
He had been struggling to monitor everything. He asked me to completely overhaul his financial plan, to map out his retirement income and organise everything in a way that made sense to him and his wife.
The first thing I asked them for was a realistic income expectation in retirement. They considered this for a couple of days and came back with the figure of £30,000 net of tax – or £2,500 per month.
Of course inflation had to be considered, but at least we had something of a map. We considered the best assumptions to use for inflation and investment growth. In the end, Mr Jones asked me to assume the same investment growth as inflation (so currently around 2.7 per cent net pa). This was so that he could keep the planning simple and very much in today's terms.
He felt that this would be most understandable for both him and his wife. Therefore I explained that leaving large amounts in cash was just not an option. As with all client plans - I like to let our clients drive the assumptions and to be involved in the figures used as much as possible, this helps them to understand that Financial Planning is an ever moving feast and cannot be guaranteed to be future proof.
Rather than focusing on Mr Jones initially, I actually started by carefully assessing Mrs Jones pension position and plans. Mrs Jones explained that she was not ready to retire for another seven years. This is because she took a career break to raise the couple's children.
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Mrs Jones enjoys a good part-time job earning £12,000 pa net. I went on to research Mrs Jones state and occupational pension projected incomes. It seemed as if Mrs Jones could expect around £7,700 net in total in seven years time. I also looked into Mr Jones state pension, this was projecting around £6,000 net in seven years time. Therefore, I was able to build on a reasonable assumption of around £13,700 income from 2019. Furthermore, we could count on around £12,000 pa income for the seven years until that point because Mrs Jones will continue to work. This left me a shortfall to work on of around £18,000 pa in today's terms for the next seven years and £16,300 pa thereafter – again in today's terms.
I looked at Mr Jones' Sipp arrangements. He voiced concerns in regards to the low annuity rates currently on offer and was really against annuitising his pensions as early as in two years time. Furthermore, he had been worried that his largest Sipp fund was held in cash. He really wanted to see if there was a way that the pension funds could be offered a better chance of longer term growth. This was particularly relevant as his other two smaller Sipp plans were locked down into collective property ventures which needed time to be sold and broken up.
To this end we decided to plan for the first three years of retirement shortfall from 2014-2017 using some of our clients surplus cash funds. We calculated that this would take a chunk of around £54,000 from the bank accounts (£18,000 pa) – which they confirmed they were comfortable with. They were aware that they have been cash heavy and it really helped Mr Jones to be able to visualise those early years of retirement income.
We then planned for the next two year phase from 2017-2019. We decided that Mr Jones could then crystallize his larger Sipp fund and take around £40,000 in tax free cash in today's terms – leaving the remaining fund invested in a low risk arena. This also would leave the other two Sipp funds intact. Based on the same £18,000 pa shortfall in today's terms, Mr Jones was then pleased to see that this cash should bridge the income shortfall for the two year period.
Finally we planned for the future from 2019 – once Mrs Jones had retired fully. By this point Mr Jones will be 66 and Mrs Jones will be 65. Mr Jones felt that at this point he would then consider annuitising his pension funds which at six per cent (based on current approximate annuity levels) on the remaining Sipp funds (around £241,000 in today's money) would deliver around £11,500 net pension income in today's terms. When adding this £11,500 to the state and occupational incomes already considered of around £13,500 – we had a small shortfall to contend with of around £5,000 pa in today's terms.
Assuming absolutely no investment growth in seven years, we worked out that our clients should still have around £193,000 left in cash savings and investment Isas. Assuming a modest return of around 2.6 per cent pa we were able to quite quickly see that the final piece of the puzzle could fit for our clients.
It was clearly important to get the actual investment management right within this plan. Our clients had been used to nearly two decades of piecemeal advice with various different Pep and Isa funds set up and never reviewed. Mr Jones really wanted clear guidance as to whether he and his wife should keep these funds or sell them and why.
We carefully analysed the funds and could see that many of them were now not among the best performers. Indeed there were some very poor funds that our clients had been holding onto without any idea that something better could be put in their place. We were able to work out which funds could be kept and which ones to sell.
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We then put Mr and Mrs Jones' portfolios existing asset allocations through our 'back testing' analysis. We wanted to see what levels of volatility the portfolios had exhibited and to examine the collective skill of the current fund managers in achieving maximum growth for minimal risk. We also wanted to drill down to the underlying asset allocations that were in place. We were able to comprehensively demonstrate that our clients fund spreads were not diverse enough to meet their new chosen risk strategies.
Of course there were risks to this plan. Inflation could be harsher than investment returns, or annuity rates could be even worse in 2019. The plan depends on several factors, including the continued ability of Mrs Jones to keep working.
Furthermore the plan doesn't help our clients IHT position. However, our clients actually felt that their own retirement planning flexibility outweighed the liability of IHT for their children.
Mr and Mrs Jones have a valuable property which they intend downsizing certainly within the next decade. This may free up capital to be utilised more fully for IHT purposes. We will revisit this topic now on a yearly basis with our clients. It may be possible to address this area through either outright gifting or via trusts in the coming years – once the clients have confidence in their plan and they have settled into retirement.
As a back up plan to help improve investment returns, I suggested that both clients seek to maximise their current disposable income over the next two years while Mr Jones was still working. Mrs Jones is already maximising her AVCs in work and Mr Jones felt reluctant to fund his pensions any further as he felt already overcommitted to this arena. Therefore, I outlined the benefits of pound cost averaging and described a monthly savings plan to help bolster the values of the Isa holdings. Both clients felt that this was an excellent idea and set up regular monthly savings into their Isa funds straight away.
Next we had to organise everything. Firstly we considered the charges within Mr Jones' largest Sipp in cash, we concluded he didn't actually need all the functions offered by a full Sipp. This enabled us to transfer the pension fund to a more cost effective arrangement where we also put in place a cautious portfolio for him.
We designed for both clients new risk strategies for their disparate Isa funds which we also moved into one more cost effective place. Mr Jones was happy with a slightly more adventurous strategy than his current pension funds – as he now understood when he was likely to call on these funds, because of our discussions.
Mrs Jones felt confident to take slightly more risk than her husband with a larger percentage of equity holdings. This meant that we ended up with three different risk strategies and subsequently different portfolios for each specific tax wrapper.
Although this plan will be constantly reviewed and adjusted accordingly, Mr Jones said that he felt more relaxed about his retirement than he had in years. Not because we had come up with a magic solution but because he now had a plan to work towards.

What happened next
In the cases of the pension funds and the Isa funds we are now monitoring these three portfolios on a regular quarterly basis. We write to our clients telling them how the portfolios are doing and we recommend any tweaks that we would like to make for them with their permission.
Mr and Mrs Jones had their first quarterly review last week and they commented on how pleased they were to see everything now up and running. They feel empowered in regards to their investment plans, realising that everything is being carefully monitored and reported back to them on a regular basis.
Since designing the plan, Mr Jones now informs me that one of the small Sipps has sold the underlying property and he needs to invest the underlying funds. And so the plan continues to evolve...

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