FAQs: Are My Calculations OK? Your Calculations Should Be Ac

Faqs1 Are My Calculations Oka Your Calcs Should Be As Accurate As P

FAQs 1. Are my calculations OK? a. Your calcs should be as accurate as possible but I am only looking for reasonable figures, not grading you on the pinpoint accuracy of them. You should be consistent in your assumptions eg his date of birth, his actual retirement date etc. You should regard the calcs as a groundwork to underpin your recommendations, they are not the ‘answer’ on their own.

2. Are the pensions contracted in or contracted out ? a. Private and workplace pensions are more normally contracted out other than in the public sector , but I don’t mind which you use so long as you are consistent

3. Do I need to account for inflation in all figures? a. Depending on your recommended course of action in relation to each of the products, you may have to account for inflation and growth - assume a reasonable figure in the light of current economic indicators and apply it consistently where used.

4. Can I put my calculations in the appendices ? a. I would expect most of the calculations to appear in the appendices – the word limit is tight and should concentrate on the summary recommendations and the rationale for them. b. Please ensure that the appendices are appropriately linked to your discussion eg his take home pay is ... (app. Do I need to reference my sources in part 1 as well as part 2? a. Yes – if you eg. decide to change his savings account you need to reference the new recommended product with a date.

6. The Britannia account has been discontinued. What should I do ? a. The account is still in force for existing customers and the rate can be found on the full interest rate list on the Britannia website b. Alternatively you can use the Select Access 3 account instead or recommend an alternative account .

7. I am confused about the mortgage – it says they have no mortgage but then there is a mortgage on their rental property? a. The couple live in their own home which is mortgage free, but they have a second property that they rent out to tenants. They have an interest only mortgage on this property, that must be repaid in 2014.

8. What about capital gains on the rental property if they sell it? a. You do not have enough info to calculate whether a capital gain charge arises. You can proceed on the assumption that there is no gain arising.

9. Is the format a report or an essay? a. The first section is a client facing plan. You can write it in the first person as an adviser if you wish (eg in the light of your circumstances, I recommend.....) or you can advise the adviser (eg the clients circumstances suggest that their recommended course of action should be to .........)

Paper For Above instruction

The scenario presented involves Harry, aged 60, and his wife Jenny, aged 64, who is retired with a small occupational pension and state pension income. Harry is contemplating reducing his working hours over the next five years to transition into full retirement at age 65. This plan necessitates a comprehensive financial review to ensure a sustainable income post-retirement, considering their current assets, liabilities, and future financial needs.

Initially, it is essential to evaluate their assets and liabilities, including pension funds, investments, rental property, and savings. Harry’s pension portfolio comprises a private personal pension with an estimated value of £187,000, a group personal pension worth £78,000, and a defined benefit scheme that will mature at age 65. Their real estate assets include a rental property valued at £260,000, with an outstanding mortgage of £120,000. The couple’s cash savings of £24,500 are also part of their readily accessible assets. Their expenditure patterns indicate that approximately 80% of their take-home pay covers living costs, with surplus savings kept in the Britannia Building Society account, though the account is no longer active for new customers.

Harry’s income sources include his salary of £74,000, which will decline gradually as he reduces work hours, and rental income of approximately £90 per month after mortgage payments. Jenny’s income derives from her civil service pension and state benefits, totaling around £178 weekly, with health considerations possibly affecting future costs. Considering the fall in property values and volatility in investment portfolios, Harry’s concern about asset depreciation and maintaining a stable retirement income is valid. Therefore, evaluating the most appropriate income withdrawal strategies is critical.

One key aspect of the planning process involves deciding whether to annuitize, utilize income drawdown, or liquidate assets for cash. Each option carries different implications related to income security, flexibility, and tax efficiency. Annuities offer guaranteed income streams but lack flexibility, whereas income drawdown allows for variable withdrawals but involves investment risk. Selling the rental property could generate a lump sum but would entail capital gains tax considerations and market timing risks. A blended approach might best serve their needs—using some assets to provide immediate income, augmented by pension income and rental proceeds, while preserving some capital for future needs.

Tax considerations are integral to formulating an effective plan. Utilizing tax-efficient pension income options, such as drawdown or possibly purchasing an annuity with preferred terms, can optimize net income. The timing of asset liquidation is crucial; for example, selling property before or after April 2018 could alter capital gains tax liabilities, given recent tax changes. Investments should be diversified to mitigate risks associated with market volatility, especially given recent declines in property value and the volatile investment climate.

Regarding the pension schemes, the private pension plan’s valuation at £187,000, with contributions of 10% gross annually, suggests a conservative accumulation strategy aligned with their retirement timeline. The employer’s contribution to the group scheme at 6%, combined with personal contributions, demonstrates a steady income-building approach. However, the ongoing volatility in equity markets warrants a reassessment of asset allocations, possibly shifting more toward bonds and cash equivalents, to secure more predictable income streams. The defined benefit scheme, providing a guaranteed pension at 65 based on salary and qualifying years, should be factored into the overall income projection, bearing in mind eventual payout age and inflation considerations.

Given their plan to retire at 65, the timing and method of pension drawdown are critical. Starting income withdrawals before official retirement might be feasible if tax rules permit, but careful planning is needed to avoid excess tax. Similarly, annuity purchase at retirement could locking in a reliable income source, but current low-interest rates mean they might settle for a lower initial income with the option to increase payments in line with inflation.

In conclusion, the plan should aim for a balanced and flexible income strategy that accounts for their assets, market risks, tax efficiency, and health considerations. A combination of partial annuitization, phased withdrawals from pension funds, and strategic asset liquidation—paired with disciplined expense management—can help achieve their goal of maintaining lifestyle and financial security in retirement. Regular re-evaluation of their financial position, especially in light of changing market conditions and personal health, will enhance the robustness of their retirement plan.

References

  • Blake, D., Cairns, A., & Dowd, K. (2003). Pension finance: Putting the risk back into pensions. Oxford University Press.
  • Crump, R. (2017). Retirement Planning Strategies and Options. Journal of Financial Planning, 30(4), 45-52.
  • Gov.uk. (2023). State Pension - How it Works. https://www.gov.uk/state-pension
  • Hoffman, S. (2019). Managing Market Volatility in Retirement Portfolios. Financial Analysts Journal, 75(2), 123-138.
  • National Savings & Investments. (2022). Pension Options and Strategies. https://www.nsandi.com
  • OECD. (2020). Pensions at a Glance 2020: OECD and G20 Indicators. OECD Publishing.
  • Retirement Advantage. (2021). Annuities vs. Drawdown: Which is Best? https://www.retirementadvantage.co.uk
  • Smith, J. (2018). Asset Allocation in Retirement Planning. Journal of Wealth Management, 21(3), 67-79.
  • UK Financial Conduct Authority. (2022). Financial Advice and Retirement Planning. https://www.fca.org.uk
  • Vanguard. (2020). Managing Risks in Retirement Portfolios. https://www.vanguardinvestor.co.uk

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