Matthew Aitchison CFPTM Chartered MCSI, managing director of Clear Vision Financial Planning, deals with the case of a family who wanted to boost their quality of life and time spent together.

Case study brief

Harry and Lucy approached us for retirement advice when they were both 53 years old.

Harry was a senior partner in a successful firm of solicitors while Lucy had a part time job. Harry worked Monday to Friday and was desperate to spend more time with Lucy and their two sons.

Their eldest son was due to start university in London, while their youngest son had a few years left in private school. They were keen to help their sons to achieve a good start in life with both their education and gaining a foothold on the housing ladder.

Harry and Lucy had assets totalling over £2.5 million as well as mortgage debt of £225,000. Their surplus income was around £100,000 per annum.

When we first met Harry, he was concerned that he had no idea what his pensions would deliver and when he could retire. He was also frustrated with his current adviser regarding both the lack of transparency regarding fees and the level of service and communication he received from his adviser.

This is a real life case study. Names and some other details have been changed to protect confidentiality.

The Case Study

When Harry first contacted us we spoke on the telephone to ensure that there was a good potential fit to working together. Once that was established, we set up an ‘introductory’ meeting. This is the start of our discovery process. It allows us to establish whether there is a basis for working together moving forward. This includes whether there is enough trust between us, whether we can add enough value and, importantly whether we like each other.

During the meeting, it became clear that Harry wanted to scale back his working hours and spend more time with his family. A typical working week saw him leave the family home on a Sunday night, stay away Monday to Thursday night, then drive home on a Friday evening. He missed his wife terribly and felt like they were “ships that passed in the night”. He also expressed his frustration with his current adviser. Even though Harry was paying into his pension, he had no idea when he could scale back his working hours and retire. He had no clear strategy and was given no guidance as to what he needed to pay in to reach his goals. Coupled with this, there was a complete lack of transparency in terms of the total ongoing costs, and more importantly, what he was getting for the fees he was being charged. It was clear that we could help Harry but we had one proviso - Lucy had to be present and engaged with the process. Harry was pleased with this, as his wife did not like the current adviser and avoided any contact with him. As a result, she was completely uninterested and felt disconnected from the process.

After the meeting we put together our proposal and arranged the ‘discovery’ meeting. This meeting took place with both Harry and Lucy present. Lucy was initially sceptical about being present, but I reassured her that her presence was just as important as Harry’s. During our discussions she began to open up and engage more. At times the meeting became quite emotional as it was clear she missed Harry as much as he missed her. She admitted to not liking their previous adviser, and never feeling like the meeting was about them, only about Harry’s pension. I reassured them that my focus was them. The money was purely a means to an end.

During the meeting I gathered lots of information about them, their family, their aspirations for the future as well as the facts about their income, existing assets, liabilities and policies. We discussed their goals and objectives in great detail. Harry and Lucy both desperately wanted to spend more time with each other. They missed each other terribly but felt trapped by their financial commitments that required Harry’s income to be fulfilled. These included a nice lifestyle, expensive holidays, school fees, future university fees and an interest in expensive cars.

Harry and Lucy had also just purchased a flat for their son to live in while at university. Both sons have part ownership of the flat, with Lucy holding the rest, to help them on the housing ladder.

After this meeting, I left them with some homework to complete, including a risk questionnaire and expenditure questionnaire to complete and return to me.

The main area that we focused on was establishing how far away from retirement Harry was, and what he needed to do to bring it closer. Previously, pension contributions had been made once a year based on how Harry felt about the pension investment. Usually this led to small contributions in years when performance was poor and larger contributions when performance was good. We discussed the nature of long term investing while looking at long-term peaks and troughs of the market. He agreed that from now on, contributions needed to be based on future planning, not the emotions linked with performance.

The assets that Harry and Lucy had initially were the family home, a flat that Harry lived in Monday to Friday, the flat bought near their son’s university, an investment portfolio of circa £200,000, a pension pot of circa £550,000, a small amount of cash and a number of cars and personal effects. However, to fund the purchase of the university flat Harry and Lucy had taken out a mortgage. The outstanding debt at the time of our planning meeting was £225,000.

As we collated all the information we built Harry and Lucy’s lifetime cashflow model. Initially, this did not look particularly healthy as it had them running out of money around the age of 90. As such, we developed a strategy that included aggressively paying down the debt, increasing the amount paid into Harry’s pension as well as paying into Isas. With everything combined, the cashflow looked much healthier and would allow Harry and Lucy to fully retire at the age of 60.

In our planning meeting we ran through Harry and Lucy’s current situation and the assumptions used. We then talked through our recommendations for every step of the plan and the rationale behind it. We also discussed Harry’s work situation. We established that there was the possibility of working closer to home and only staying away occasionally. It would couple with a drop in income, but we showed Harry and Lucy, using cashflow modelling, that this could be offset by the capital released from the sale of the mid- week flat. This capital could then be used to clear the debt and plug the gap that would be left in retirement savings.

We also reviewed Harry’s pension and the investment strategy being used. The contract was perfectly suitable being open architecture and having a low ongoing cost; however, the cost of the funds, discretionary fund manager and previous adviser had pushed the total expense ratio up to 2.75 per cent per annum. This was before considering undisclosed costs.

Not only that, but the investment strategy was taking much more risk than Harry and Lucy were comfortable with (and needed to fulfil their long- term strategy). The output from the risk profile questionnaire and our discussions was that Harry and Lucy were comfortable taking a medium amount of risk. However, the current exposure Harry had to equities in his pension amounted to over 90 per cent of the assets. Harry was shocked at the level of risk and charges he was being exposed to and felt let down, both by his previous adviser and the DFM. We removed the DFM and replaced them with a low cost asset class approach that, when combined with our fees and the wrapper fees, lowered the TER to 1.50 per cent per annum (a saving of 1.25 per cent per annum). We also greatly reduced the equity exposure so lowering the volatility. This meant the portfolio was more aligned with Harry and Lucy’s risk tolerance, as well as their required growth rate.

The investment portfolio was a large collection of individual stocks that Lucy and her father had compiled. During our meeting we discussed diversification and the danger of individual stock holdings, however, Lucy was keen to remain in control of this for the time being.

We discussed how essential the portfolio was in the overall financial plan and the importance of prudent management of the assets. Lucy was confident that she could continue to manage it. However, we agreed that this should be monitored as part of their overall net worth. If, in the future, the portfolio wasn’t delivering the required growth, it was agreed that she would defer management to us.

We also discussed estate planning as Harry and Lucy were keen to maintain a healthy asset base to pass down to their sons. We agreed that the primary aim was to achieve financial independence by the age of 60, enabling Harry and Lucy to enjoy their desired lifestyle for the rest of their lives. Once that was achieved we would look at gifting strategies and balancing their lifestyle requirements against estate planning strategies. We did, however, ensure that their wills were up to date, that they had lasting powers of attorney in place and that their nominations for any death benefits were suitable and efficient.

At the end of the planning meeting, Harry and Lucy were visibly energised. They could see how by using their current assets and future income streams more effectively, they could achieve all the goals that were important to them. Most importantly, they could see a point in the future when they could spend more time together, and it was closer than they thought.

What happened next

All recommendations have been completed including the restructuring of the pension investment strategy to provide substantial ongoing cost savings. Harry moved roles and has sold the mid-week flat. The proceeds were used to clear the remaining mortgage debt and to make a single pension contribution using carry forward to mop up previous years allowances.

Lucy has given up work and we have explored the effect on their cashflow model of Harry moving to a part-time role. The results were that this could be done without negatively affecting their long-term strategy. As such, Harry will be phasing in his retirement soon.

Harry and Lucy now see much more of each other, and Harry feels more involved with family life. They are much happier and relaxed than when we first met up. They know both where they are currently and that they are on track to achieve their goals and aspirations.

Key points

1 - Make sure to involve all parties in the advice process. Everyone’s aspirations are relevant and will impact on the advice, so everyone should be engaged in the process.

2 - Dig a little deeper. Clients may not tell you what they really want straight away as they may not believe it is achievable, even though it may be closer than they think.

3 - We should never forget that we can make a hugely positive difference to the current and future lives of our clients.