Mrs Jones came to me in 2011, immediately following the death of her husband. They had attended one of my seminars about Inheritance Tax planning a few years earlier. At the time of the seminar her husband was happy looking after their affairs and he felt that they did not require any assistance with their Financial Planning.
However after his death, Mrs Jones was shocked to find out how much their assets amounted to (especially as her husband had always been very careful with their money) and that on her death there would be a substantial tax bill for her sons to pay.
She was thrown into a state of confusion and worry. All of Mr Jones' estate had been left to Mrs Jones in his will and with his papers she had found a document containing my details and a note to contact me once he had died.
In our first meeting I established a good rapport with Mrs Jones, to my mind, an essential pre- requisite to understanding her concerns and
worries and how I could help her. Mrs Jones was 73 and had been a professional
harpist with a leading orchestra and had taught for some years at a private school in Cardiff. She had two sons - one was a property developer living in Canada with his wife and two children. The other son lived in Cardiff and was less financially secure with some significant debts. He was divorced and had three children, one of whom was disabled (with Downs Syndrome). She was frustrated with her younger son because he didn't have the ambition of his older brother and seemed to "bumble from one dead end job to another."
She was very emotional at our meeting and told me that she had no clue what to do next, as her husband had always taken control of the money. She admitted that when the children had got a little older she still had no inclination to get involved in the household finances, preferring to put all her efforts into teaching and her hobbies, which included playing the harp, piano and singing in a local choir.
She was living in a big five-bedroom house in the Vale of Glamorgan, which she was finding difficult to manage. The house was mortgage free and valued at around £1.2 million. She was worried about her health in the future and whether she could afford to have help at home or nursing care. She wanted to move closer to her son in Cardiff and then never to have to move again. She would like a retirement village sort of place (like she had seen in the film Cocoon) where she had her own apartment, with assistance at hand to help her feel more secure. She did not drive due to leg problems and costs for taxis or the bus were a concern, especially as she had no real budgeting skills.
She was worried about her Cardiff son and her disabled granddaughter, with whom she spent a lot of time. She wanted to help them out but was concerned about whether her income was sufficient to allow her to give money away.
She was also feeling some pressure from a man at the bank who was urging her to invest the £400,000 in her bank account into "stocks and shares" that she did not understand.
I established at our meeting that she had pension income of £28,000 net per annum, made up of various pensions. She had various investments including Isas, unit trusts, other collective investments and direct stocks and shares, altogether valued at around £270,000 and cash in the bank of £400,000. Generally she lived within her income and rarely dipped into her capital.
I asked her about her hobbies. She was passionate about Welsh music and helping young people to learn to play the harp. She gave some free music lessons to local girls and was still involved with the school where she had taught.
She often took short trips around the UK, visiting National Trust venues and historical Welsh towns. She did not like flying so this restricted her holiday destinations somewhat but she hoped to take her son and children from Cardiff to Disneyland Paris on the train sometime soon. She also was thinking that for her 75th she would try and get all her family together, including her son and his family in Canada.
We agreed that the best way forward would be to complete an assessment of her income and expenditure to enable me to complete a financial cashflow forecast and also assess her risk profile, to enable me to make specific recommendations. We use Finametrica as our risk profiling tool, and I provided her with this questionnaire and expenditure questionnaire as her 'homework' to complete for me. I always place emphasis on the importance of the client completing their part of the work, to ensure that they get the most from the cashflow exercise, thus ensuring that it is a true reflection of their present circumstances and the best possible forecast of the future situation.
At our meeting, we agreed that Mrs Jones had the following objectives:
- To be free from any money worries and learn how to control her budget
- Sell her home and find more suitable sheltered accommodation
- Gift money to her sons and grandchildren if possible
- Establish her requirements in regards to nursing care in the future and how she would fund this
- Invest surplus funds to ensure growth ahead of inflation
- Consider how she may remain involved with the school and encourage more girls to take up playing the harp
- Have a big celebration with all the family for her 75th birthday
Once Mrs Jones returned her 'homework' I prepared her financial cashflow forecast and we met again to discuss this and for me to make my recommendations. We knew by this time that after she purchased the new home she would have £750,000 cash available to add to her other liquid assets, a total of £1.42 million.
Mrs Jones really liked the pictorial cashflow forecast, which made things simple and easy for her to understand. Despite having no financial experience herself, she quickly got to grips with the importance and benefits of Financial Planning. The financial cashflow showed that she had plenty of money to see her to age 100, based on her current and anticipated expenditure details. It was necessary to model a reduced household expenditure and also some increased holiday expenditure and money for a new kitchen and furniture in the bungalow. The cashflow forecast illustrated that her total net worth was £1.87m. This really terrified her - what would she do with all the money? The Inheritance Tax liability on her estate was close to £500,000 and was a huge concern to her as she wanted her family to inherit as much as possible.
Having ascertained that she lived quite comfortably on her pension, we discussed her needs for capital both now and in the future and did some scenario planning within her cashflow forecast. I illustrated the effect of her requiring long- term care, costing £40,000 per annum (in one of the best care homes in Cardiff) for a period of 10 years, and forecast that capital of at least £400,000 would be needed if this scenario was to occur. In addition, we agreed a figure of £15,000 to ensure she could afford to fly her son and family over from Canada and pay for them all to go away and stay in a posh hotel for her 75th birthday and £5,000 in cash to spend as she liked!
Having established she would be comfortable in the future and dealt with the worst case scenarios of her becoming very ill, this left her with £1m in readily realisable assets. I discussed whether she wanted to keep control of these assets or to be able to call on them later, but she was reassured that she could give some capital away without worry. She was thrilled that she could help her children and grandchildren while she was still alive.
We agreed that her next priority was to help her son who had mortgage problems. We recommended that she offer to repay her son's mortgage of £150,000 as she didn't want to just give him money to fritter away. I also advised her to speak to her other son in Canada and after some discussion she also gave him £150,000.
In addition, we helped her to set up a Trust for the five grandchildren for £300,000, splitting this as £200,000 for the able-bodied grandchildren to fund higher education costs and helping them with their first home and £100,000 for her disabled granddaughter to go some way to making sure she would always be financially secure and able to get the care she required. We agreed an appropriate portfolio asset allocation and invested via an investment bond with the two brothers as Trustees.
She still had too much money for her own needs so I suggested that she could consider charitable giving. After some discussion we agreed that she would set up a bursary at the school where she had taught, gifting £100,000 into a charitable trust to fund music lessons for budding harpists.
The gifts, valued under her nil rate band, would not create any lifetime inheritance tax charge and if she survived the next seven years she would once again be able to benefit from the full nil rate band, enabling her to make further gifts in the future.
However, if she died within this period her estate would still be liable to Inheritance Tax and we discussed the merits of insuring this liability. Mrs Jones disliked this and decided to gamble that she would live a further seven years. Saying this, the liability on her estate after seven years was estimated still to be at around £250,000, and I persuaded her that it was very sensible to insure this lower figure using a whole of life policy. The costs of this were discussed and agreed with the family and the necessary insurance was effected in trust.
This left Mrs Jones with around £300,000, which we agreed to invest in line with her attitude to risk, alongside the money allocated for long-term care requirements. This meant a total investment of just under £700,000, leaving the money for Disneyland; the big 75th birthday celebration and extra spending in cash. A risk group four portfolio with approximately 50 per cent stable and 50 per cent volatile assets was recommended to take account of tax efficient Isas, rebalanced each year.
What happened next?
When we met again at her first annual planning meeting, Mrs Jones was happily settled in her new home. She was starting to get to grips with managing her own finances and was really happy that she had done as much as she could to help her family.
Her Cardiff son was doing really well without the pressure of his mortgage repayments and had found a new job with better prospects. Her 75th birthday party was turning into a bit of a shindig and she told me she may need some more money from the portfolio for this, which we had forecast, so I could reassure her that this was completely fine.
The bursary for the girls' school has encouraged four new young harp players and she attended a school concert which gave her a lot of joy.
I am delighted that we have helped Mrs Jones to have a comfortable, worry free retirement and that she in turn is delighted with our help.