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  • FIRST POST
    • Joey Soap
    • By Joey Soap 10th Feb 18, 8:57 AM
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    Joey Soap
    What do you do when there is not enough money?
    • #1
    • 10th Feb 18, 8:57 AM
    What do you do when there is not enough money? 10th Feb 18 at 8:57 AM
    Well, as per the heading. A relative has found themselves in a very difficult situation and though I am not an adviser I am the only person they know who can even half sensibly try to plan a way through the mess. They simply cannot afford to pay an adviser.
    This married couple have worked all their lives and raised a family on a very poor income. The home is paid for but not worth a lot of money, maybe £160k perhaps. The adult children have left home. The only debt is a smallish personal loan. I am not sure how much, but it won!!!8217;t be a lot. There are virtually no savings to speak of. There is no life insurance.
    One of the couple has always worked fulltime in a low paid job and has accrued a very modest defined contribution pension pot. The value of the pot is about £180k I understand, but the final figure is not yet certain. The other person has only ever had low paid casual work the last 30 odd years and no pension pot.
    Sadly, one of the couple (the one with the pension pot) is very ill and has been recently diagnosed with a terminal condition. Less than a year to live almost for 100% certain.
    Presently, the couple live on benefits, it is impossible for ether of them to work, one of them is a fulltime carer, obviously.
    At the present, the DC pension is not yet in payment. The default annuity is pitiful. Even more pitiful is when the person passes, likely in less than a year, the joint annuity pays only 50% to the survivor.
    This would be the only source of income for that person, the benefits would cease.
    Clearly, this person has no option but to seek work in the future. With 11 years to state retirement the person will have to in fact contribute NICs for all those years too to qualify for the full state pension.
    It seems to me that a transfer of the DC pot to a SIPP is essential, urgently in fact, to protect the capital. The capital will not be drawn down on as they are managing (just) on benefits.
    I think at the present, the couple manage on an income of about £1000 per month and this is the target income once the very ill person passes.
    The way I see this happening is to set aside say £70000 as a pot to live off at a rate of £6000 per year for the next 11 years until state pension age. This would therefore be £500 a month, half what is required. The other £500 a month will have to come from employment. At minimum wage (that is very likely the best that can be hoped for) that is going to require approximately 67 hours a month of paid work. With a total earned income of just £6000 clearly there will be no tax to pay. I do not know about NICs on such a low salary.
    The remaining £110,000 pension pot I think, needs to be invested into a steady and relatively secure investment within the SIPP. It will remain invested without drawdown for hopefully the next 11 years. At a return of say 5% the pot should grow to about £190,000 in the 11 years, as long as it remains untouched. If 4% is then drawn down from the pension pot that will provide £7600 a year income plus around the same again from the state pension. Total income at retirement therefore, about £15,000 in 11 year!!!8217;s time in today!!!8217;s £!!!8217;s.
    Obviously, the numbers can be tweaked round the edges but I!!!8217;m completely flummoxed what else to do with such dire circumstances.
    What do the forum contributors make of it please? Thank you for your input and sorry for the long post.

    This Forum tip was included in MoneySavingExpert.com's weekly email!
    Last edited by MSE Andrea; 14-02-2018 at 11:49 AM.
Page 3
    • Linton
    • By Linton 11th Feb 18, 12:53 PM
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    Linton
    Having looked again at your figures it seems to me you are being inconsistent with regards to risk management and may be taking insufficent account of inflation.......

    a) In the next 11 years
    You are proposing extreme caution with the £70K by keeping it all in cash for the whole of the 11 years. On the other hand you are expecting to create a pot of £180K in that time. Is this at current prices or simply in £ terms? If the former relying on an average return of 5%+inflation is risky and probably would not be achieved with "a steady and relatively secure investment" and could well be missed anyway. On the other hand if it is in £ terms £180K would be worth only around £135000 in today's money in 11 years time with 2.5% average inflation.

    b) 20-30 years of drawing down 4% of starting lump sum every year
    Presumably this is increasing with inflation? If so, again, you will probably not be able to achieve this with investments that produce a steady return. You will need a significant % equity with the risk of occasional major falls in value.

    Modelling the £180K/£7600 proposal on http://www.cfiresim.com suggests (based on historical US data) that with these numbers there is around a 50% chance that the pot size will drop below 60% of its initial value at some stage even with a relatively cautious 50% equity/bond split. Might your relative be getting a little worried were this to happen?

    If you are intending to set expectations perhaps you should be rather less ambitious.

    And finally - a £180K drawdown portfolio will require ongoing management for the rest of your relative's life, say for the next 30-40 years Who is going to provide this?
    • zagfles
    • By zagfles 11th Feb 18, 12:53 PM
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    zagfles
    I am Not adviser nor am I related to one. I do however know what they do. And if its no business of mine pulling you up on innaccuracies, dont post in an anonymous forum for advice?

    And you c an find avisers who charge only .5% . Look for one, or be prepareed to be sued by all who you advise if things go wrong.

    Advice is a regualted activity. And you are not regulated.
    Originally posted by atush
    Do you seriously think you need to be regulated to help friends and family with their finances? You only need to be regulated if you give advice "by way of business". Which is defined by the FCA here: https://www.handbook.fca.org.uk/handbook/PERG/8/34.html
    • atush
    • By atush 11th Feb 18, 4:03 PM
    • 16,524 Posts
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    atush
    yes, given the warnings here on the site not to give 'Advice'. And given th Op appears to be running the finances and prtfolios of numerous people. Who may or may not be paying him in some form be it barter, cash, or services. We dont know, they ahvent said.

    I can just see a major crash or correction coming along and all these 'friends' not being so friendly when they've lost a lot of money. AS he may not be able to acertain 'their' true risk level. And invest for them according to his own risk level.

    Your friends and family could sue you in those cases.
    • Linton
    • By Linton 11th Feb 18, 4:23 PM
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    Linton
    yes, given the warnings here on the site not to give 'Advice'. And given th Op appears to be running the finances and prtfolios of numerous people. Who may or may not be paying him in some form be it barter, cash, or services. We dont know, they ahvent said.

    I can just see a major crash or correction coming along and all these 'friends' not being so friendly when they've lost a lot of money. AS he may not be able to acertain 'their' true risk level. And invest for them according to his own risk level.

    Your friends and family could sue you in those cases.
    Originally posted by atush
    I dont think someone giving unpaid for advice, or managing someone else's finances for free could be successfully sued. However the more general point is well made .....

    Running someone else's finances is nevertheless highly risky. If things appear to go wrong, even if there is no actual fault, there is the real danger that friendships and families can be split apart. The point about investing to the appropriate risk level is very valid. A further aspect is one's own feeling of responsibility. How would you feel if the financial well being of a close family member or friend was seriously compromised on your watch?

    Personally, I would be unwilling to manage the investment of significant assets for anyone other than a spouse without taking professional advice.
    • zagfles
    • By zagfles 11th Feb 18, 4:54 PM
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    zagfles
    yes, given the warnings here on the site not to give 'Advice'. And given th Op appears to be running the finances and prtfolios of numerous people. Who may or may not be paying him in some form be it barter, cash, or services. We dont know, they ahvent said.

    I can just see a major crash or correction coming along and all these 'friends' not being so friendly when they've lost a lot of money. AS he may not be able to acertain 'their' true risk level. And invest for them according to his own risk level.

    Your friends and family could sue you in those cases.
    Originally posted by atush
    Maybe you can give some examples where this has happened? Or are you just trying to scare the OP while he's is trying to help his dying friend/relative.

    I've given the FCA link. Personally I'll believe that.
    Last edited by zagfles; 11-02-2018 at 5:31 PM.
    • zagfles
    • By zagfles 11th Feb 18, 5:10 PM
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    zagfles
    I dont think someone giving unpaid for advice, or managing someone else's finances for free could be successfully sued. However the more general point is well made .....

    Running someone else's finances is nevertheless highly risky. If things appear to go wrong, even if there is no actual fault, there is the real danger that friendships and families can be split apart. The point about investing to the appropriate risk level is very valid. A further aspect is one's own feeling of responsibility. How would you feel if the financial well being of a close family member or friend was seriously compromised on your watch?

    Personally, I would be unwilling to manage the investment of significant assets for anyone other than a spouse without taking professional advice.
    Originally posted by Linton
    Friends and families give each other advice on all sorts of matters all the time, sometimes over life and death issues not just mere money. I've just been advising someone scared of flying that flying is safe, compared to travelling by car. Maybe they'll die in a plane crash in 3 years and it'd be all my fault.

    It'd be a sad world if we all stopped trying to help others in case that help backfired occasionally.
    Last edited by zagfles; 11-02-2018 at 5:16 PM.
    • Linton
    • By Linton 11th Feb 18, 5:37 PM
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    Linton
    Friends and families give each other advice on all sorts of matters all the time, sometimes over life and death issues not just mere money. I've just been advising someone scared of flying that flying is safe, compared to travelling by car. Maybe they'll die in a plane crash in 3 years and it'd be all my fault.

    It'd be a sad world if we all stopped trying to help others in case that help backfired occasionally.
    Originally posted by zagfles
    There is a difference between a short word of advice to someone able to make their own decisions and taking responsibility for the details of an important aspect of someone's life.
    • zagfles
    • By zagfles 11th Feb 18, 6:01 PM
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    zagfles
    There is a difference between a short word of advice to someone able to make their own decisions and taking responsibility for the details of an important aspect of someone's life.
    Originally posted by Linton
    A wrong "short word of advice" can have worse or even devastating consequences. Consider the wrong advice to this: "I've just been cold called by someone who says my pension in underperforming and it'd be better invested in Cape Verde holiday apartments and airport car parking spaces, what do you reckon"?
  • jamesd
    They are actually in a pretty good position and the target income seems achievable without working but I'll start out by mentioning some of the available major mistakes that should be avoided.

    1. Buying an annuity that includes him, particularly one that doesn't allow for his health. Forget the scheme's annuity, it's a horrible buy.

    2. She's too young for annuities in her name to offer good value for money. The normal lifetime annuities also don't match her income need, which is high initial drawing then reduced after state pension starts.

    3. A person whose doctors say they have a life expectancy of under a year can take the whole of a pension pot as a tax free lump sum, not just 25%. This"serious ill health lump sum" doesn't have the age 55 restriction. But if it was all taken benefits would stop and cost about £12k in lost benefits. Bad move but taking periodic lump sums up to their benefit savings limit might be helpful. Not regular, which would be treated as income.
    • Linton
    • By Linton 11th Feb 18, 6:39 PM
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    Linton
    They are actually in a pretty good position and the target income seems achievable without working but I'll start out by mentioning some of the available major mistakes that should be avoided.
    ......
    Originally posted by jamesd
    Please could you explain how you come to that conclusion when they would appear not to have the cash reserves to go for a higher drawdown rate strategy.
  • jamesd
    Now, on to more potentially useful things.

    1. A "beneficiary pension". This is a new feature of the pension freedoms from 2015. A person who dies can leave their pot by "expression of wishes" to as many people as they like. If death is before age 75 anything up to the whole amount can be taken tax free at any time, as lumps or regular payments. 100%, not 25% tax free. There is no age restriction for taking money out, can be done for a toddler. In effect it's an immediately funded super-ISA.

    So the first easy good move is to ensure that the current place offers a beneficiary pension and set up an expression of wishes, or move to a place which does. That gets her a completely tax free £180k pot of money.

    2. Try to preserve her entitlement to benefits after his death. Unfortunately the document Pension flexibilities and DWP benefits doesn't specifically mention beneficiary pensions and I don't know how they are treated. Since she has immediate access it's possible that it would all be treated as hers immediately. You need to check.

    If normal rules apply she could take periodic, irregular tax free lump sums up to the lowest benefit savings limit which affects her. This would preserve all of her working age benefits entitlements. When she reaches her state pension and pension credit age this would cease and it would all count.

    3. Investment income. I put together a lowish risk combination of P2P lending that could be expected to pay about 7% interest. So £12,600 a year. More is possible, I recon on around 10% for the sort of mixture I use. Some of those options require ongoing work by a person who understands investments, asking her to evaluate individual loan proposals is unlikely to work. This would eliminate her entitlement to benefits but she could also deliberately draw down the capital and take perhaps £18,000 a year of combined capital and interest as income. All tax free courtesy of the personal allowance, savings allowance and starting rate for savings. Would also be good to use her ISA allowance either for P2P or other things.

    You'd probably be more comfortable with other things if you haven't yet used P2P but her needs may not be compatible with what you're familiar with today. I didn't provide for inflation protection so at least some use of equities for that may be useful, depends on how you strike the balance between drawing and preserving capital.

    4. The family home also has some potential even at £160k value. She might be fine in a smaller place or cheaper area and there's the potential for income from lodgers.

    5. State pension deferral can provide her with guaranteed inflation-linked income for life and it's probably a really good move for her.

    6. Some regular periodic buying of annuities as she gets older would probably also be a good move, in part to reduce her dependence on you and simplify her financial affairs.

    Overall I think there's potential for at least £18k a year of income here and if desired it could be started soon using the serious ill health lump sum option that I initially cautioned against.
    Last edited by jamesd; 11-02-2018 at 7:29 PM.
  • jamesd
    Please could you explain how you come to that conclusion when they would appear not to have the cash reserves to go for a higher drawdown rate strategy.
    Originally posted by Linton
    They have £180k of accessible pension money available via either the serious ill health or beneficiary pension routes. Plenty of cash buffer potential from that. Of the P2P places I mention, one has next working day easy access as a standard feature, RateSetter, another has a monthly income option, BondMason, and most of the rest can provide access within a few days. Quite modest cash buffer combined with regular income withdrawing can do the job.

    If for some reason you want to completely ignore P2P, the UK 90% success rate safe withdrawal rate using the Guyton-Klinger rules is 5.5% and that would deliver £9,900 a year over a 40 year plan. Since that ignores the state pension she can start far above that and drop back after state pension deferring.

    Their problem is far from being as challenging as it might seem and even something as basic as taking a lodger after his death can do lots of extra good.
    Last edited by jamesd; 11-02-2018 at 7:27 PM.
    • Thrugelmir
    • By Thrugelmir 11th Feb 18, 7:28 PM
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    Thrugelmir
    I put together a lowuish risk combination of P2P lending that could be expected to pay about 7% interest. So £12,600 a year. More is possible, I recon on around 10% for the sort of mixture I use. Some of those options require ongoing work by a person who understands investments,
    Originally posted by jamesd
    Chasing yield is like driving every day at a 100 mph down the motorway. One day your luck will run out. Risk is relative. Interest rate offered is a red flag indication. There'd be no confidence in P2P providers if they got their pricing hopelessly wrong.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
  • jamesd
    Chasing yield is like driving every day at a 100 mph down the motorway. One day your luck will run out. Risk is relative. Interest rate offered is a red flag indication. There'd be no confidence in P2P providers if they got their pricing hopelessly wrong.
    Originally posted by Thrugelmir
    The rates I've given are after generous bad debt allowances and well below what I actually achieve. It's how I have been and expect to continue to generate tens thousands of Pounds a year of income for myself, expecting a rate of around £30,000 a year from this summer. It's not speculation like yours about something you've never used but what someone who's been using P2P for ten years knows from doing it is easy enough.

    Longer term I think the return advantage of P2P over bonds will erode but it's here and working today.
    Last edited by jamesd; 11-02-2018 at 7:40 PM.
    • Linton
    • By Linton 11th Feb 18, 8:54 PM
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    Linton
    They have £180k of accessible pension money available via either the serious ill health or beneficiary pension routes. Plenty of cash buffer potential from that. Of the P2P places I mention, one has next working day easy access as a standard feature, RateSetter, another has a monthly income option, BondMason, and most of the rest can provide access within a few days. Quite modest cash buffer combined with regular income withdrawing can do the job.

    If for some reason you want to completely ignore P2P, the UK 90% success rate safe withdrawal rate using the Guyton-Klinger rules is 5.5% and that would deliver £9,900 a year over a 40 year plan. Since that ignores the state pension she can start far above that and drop back after state pension deferring.

    Their problem is far from being as challenging as it might seem and even something as basic as taking a lodger after his death can do lots of extra good.
    Originally posted by jamesd
    A lodger would make a lot of sense.

    How big a buffer would you have to permit Guyton Kilinger to work effectively without leaving the survivor with nothing during the bad times? - it would need to come out of the £180K and be replenished from time to time.

    If you go for P2P you need to allow for keeping some back for inflation - say 2% or more. You cant leave the survivor with no inflation matching for 30+ years.

    In both cases it would indicate your headline returns are optimistic, and as we know taking too much out of a drawdown pot early on can be disastrous.
    • redux
    • By redux 11th Feb 18, 8:55 PM
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    redux
    yes, given the warnings here on the site not to give 'Advice'. And given th Op appears to be running the finances and prtfolios of numerous people. Who may or may not be paying him in some form be it barter, cash, or services. We dont know, they ahvent said.

    I can just see a major crash or correction coming along and all these 'friends' not being so friendly when they've lost a lot of money. AS he may not be able to acertain 'their' true risk level. And invest for them according to his own risk level.

    Your friends and family could sue you in those cases.
    Originally posted by atush
    I have sat in a meeting with a family member and her financial adviser. Not independent, tied to a certain company

    When I was talking about some bank and regular savings accounts she has (set up helped by me on the internet), because he wanted to know a rough total, he said he had some other clients who ought to talk to me. I thought, but didn't say, why doesn't he drop hints about that, at least tell them where to start looking around.

    His predecessor, who retired about 18 months ago, advised her about the NSI 'granny' bonds, go for the one year version, to be cautious, in case you unexpectedly need the cash. I said go for the 4% on the long ones, as even losing some interest on early withdrawal you are better off for any period except the first few months, and who knows these might not be relaunched every year.

    I hope I won't be sued for giving better advice about the savings rates than either adviser, but now I'm looking at the fund the old adviser switched her into, from 3 or 4 he had previously recommended, all into one of the firm's own. If I carry on with my feelings about this it would look like hijacking the thread.
    • Joey Soap
    • By Joey Soap 12th Feb 18, 12:48 AM
    • 128 Posts
    • 40 Thanks
    Joey Soap
    They could use part of the £70k cash you were talking about earlier. See this (long) thread: http://forums.moneysavingexpert.com/showthread.php?t=5580163
    Originally posted by zagfles
    Thank you, I shall give that serious consideration. Though, seeing as I won't be running this portfolio, simply presenting what I find and perhaps assisting in the set up of the plans I'm not sure the person has the level of financial savvy to do this. However, it is potentially of great interest, so thanks for pointing it out.
    • Joey Soap
    • By Joey Soap 12th Feb 18, 1:03 AM
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    • 40 Thanks
    Joey Soap
    Having looked again at your figures it seems to me you are being inconsistent with regards to risk management and may be taking insufficent account of inflation.......

    Thank you, but I'm talking entirely in today's GBP, I don't think discussing what infaltion may/may not do is appropriate here, it's unknown and extremely complex.
    a) In the next 11 years
    You are proposing extreme caution with the £70K by keeping it all in cash for the whole of the 11 years. On the other hand you are expecting to create a pot of £180K in that time. Is this at current prices or simply in £ terms? If the former relying on an average return of 5%+inflation is risky and probably would not be achieved with "a steady and relatively secure investment" and could well be missed anyway. On the other hand if it is in £ terms £180K would be worth only around £135000 in today's money in 11 years time with 2.5% average inflation.

    Thank you, your point is well made. Again, I am talking in todays GBP and I have not talked about a possible 5% real return being possible. I have no "expectation"
    as such. Just trying to be fairly realistic at potential outcomes. There is only a 50% of being right whatever happens.
    b) 20-30 years of drawing down 4% of starting lump sum every year
    Presumably this is increasing with inflation? If so, again, you will probably not be able to achieve this with investments that produce a steady return. You will need a significant % equity with the risk of occasional major falls in value.

    Thank you again, I have no idea what the effect of inflation will be over a retirement lifetime. Your point is well made about market volatility. That's why at the outset I said there is not enough money in the pot for those kinds of outcomes.
    Modelling the £180K/£7600 proposal on http://www.cfiresim.com suggests (based on historical US data) that with these numbers there is around a 50% chance that the pot size will drop below 60% of its initial value at some stage even with a relatively cautious 50% equity/bond split. Might your relative be getting a little worried were this to happen?

    If you are intending to set expectations perhaps you should be rather less ambitious.

    Indeed, this is quite possible. See above about there not being enough money to start with to attain any kind of security beyond the best you can manage. I have no intention of setting expectations. I intend to outline what I have found and to try to encourage some self education around this. Though after a lifetime of blissful ignorance of my relative's part, it could be a big ask.
    And finally - a £180K drawdown portfolio will require ongoing management for the rest of your relative's life, say for the next 30-40 years Who is going to provide this?
    Originally posted by Linton
    Thank you very much. This is indeed a concern. And not only for this pot of money. my current thoughts are to suggest the majority of the pot that is invested for 11 years goes into a low cost, very broadly based tracker along the lines of the Vanguard LS 80 fund.
    And maybe a diversifier into a well run REIT for some property exposure. It's quite possible such a portfolio can run itself. However, this in itself is likely to be a serious and in depth discussion.
    • Joey Soap
    • By Joey Soap 12th Feb 18, 1:14 AM
    • 128 Posts
    • 40 Thanks
    Joey Soap
    Just a general thanks for the kind thoughts and information freely given here, it has helped me to see a way forward.

    Regarding the other stuff about running investments for people, if my kids and my wife think I'm doing a rubbish job investing the money that I gave them, then they are perfectly free to do something else with the money. Though, somehow, I doubt they will. But yes they can if they wish. Sue me for negligence? See them in court.

    Clearly, nothing written here is advice and I won't be giving advice either. A large part of the conversation will be along the lines of - "For the last 30 years you have sailed blissfully along in life taking no regards for your financial well being in the future. That has to seriously change and it has to change right now. I'll help you as best I can but you really do need to get a grip of this stuff because it really, truly, is extremely serious and you can be blissfully ignorant no longer about your circumstances".
    • Malthusian
    • By Malthusian 12th Feb 18, 12:24 PM
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    Malthusian
    Clearly, nothing written here is advice and I won't be giving advice either. A large part of the conversation will be along the lines of - "For the last 30 years you have sailed blissfully along in life taking no regards for your financial well being in the future. That has to seriously change and it has to change right now. I'll help you as best I can but you really do need to get a grip of this stuff because it really, truly, is extremely serious and you can be blissfully ignorant no longer about your circumstances".
    Originally posted by Joey Soap
    That's extremely good advice. It's the bit that follows after "but don't use a regulated independent financial adviser because they will rip you off by asking to be paid for a service" that is problematic. It is easy to say "get a grip" but their only two three options to "get a grip" have now narrowed to either

    1) conduct extensive research until they fully understand all their options and the tax / legal implications as you or an IFA would - which is second nature for 95% of this forum, but a much smaller percentage of the general population

    2) leave everything up to you and trust everything you say implicitly

    3) muddle along and accept sub-optimal outcomes.
    Last edited by Malthusian; 12-02-2018 at 5:13 PM. Reason: nobody expects the anti-adviser inquisition. our two weapons are surprise, surprise and fear, and suspicion of people who claim to know more than i do - three weapons... i'll come in again.
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