Review my parents' financial position

itwasntme001

Hi there,


My parents have asked me to get some free online help on their financial position (they are not that IT literate). They just want to see if they should be doing something different and if they are in a reasonably safe position financially. They do not want to pay for a financial advisor yet. Here is an overview:


- Both aged 64, retired, due to receive full SP in 2 years time of £18k total
- Home mortgage free, worth £700k
- Father receives annuity of £12.5k a year (no inflation linkage)
- Cash savings (including ISA) of £325k
- Equities investments (SIPP and ISA) worth £490k
- Father will at some point receive his inheritance consisting of a share in both a residential and commercial property (in total worth around £450k). His share in the commercial property would bring him an income of £15k.


Other points:
- No health issues
- They are looking to move home in a year or two to be closer to my sibling (I live with my parents currently). We will be looking for a home which can accommodate for my parents when they become elderly (i.e. downstairs bedroom and shower-room). The upgrade in location and costs of the move would mean they will need around £100k-£150k on top of the proceeds from the sale of their current home.
- My parents minimum outgoings are £12k a year. Plus around £8k a year on holidays. So total spending is £20k a year. Anything else like a home repair would be additional but obviously not quantifiable yet.



Any thoughts on what they could/should do differently, any areas of concern or any financial pitfalls they may encounter?


Many thanks!

El_Torro

Looks pretty solid.

We could argue that £325k in cash is too much, which it is. Though once they've spent a big chunk of that on a new house it may be appropriate to keep the rest as it is, especially if the SIPP and ISAs are invested relatively adventurously.

They'll need to bear in mind that the £12.5k annuity is going to erode in value over the years, so the cash, SIPP and ISA will probably be spent on topping that up.

I'm not sure an IFA could add much value to their situation, they appear to have invested / saved quite well over the years. and seem to have a realistic expectation of how much money they can spend in the future.

Without knowing how the investments are allocated it looks good.

Dazed_and_confused

Even allowing for your mum having applied for Marriage Allowance it seems she has no current income and only £9k/year State Pension to come.

So you might want to read up the option of her paying £2,880 into a relief at source pension scheme (personal pension, stakeholder or SIPP) and she can then, with a bit of care, take the income with minimal or no tax to pay. Potential £720 profit each year (before any pension scheme fees).

She can keep the fund in cash (within the pension) if she doesn't want to invest it.

itwasntme001

Dazed_and_confused wrote: »

Even allowing for your mum having applied for Marriage Allowance it seems she has no current income and only £9k/year State Pension to come.

So you might want to read up the option of her paying £2,880 into a relief at source pension scheme (personal pension, stakeholder or SIPP) and she can then, with a bit of care, take the income with minimal or no tax to pay. Potential £720 profit each year (before any pension scheme fees).

She can keep the fund in cash (within the pension) if she doesn't want to invest it.

Yeh both my parents do this, both for the £720 profit and also to shield some money from inheritance tax.

itwasntme001

El_Torro wrote: »

Looks pretty solid.

We could argue that £325k in cash is too much, which it is. Though once they've spent a big chunk of that on a new house it may be appropriate to keep the rest as it is, especially if the SIPP and ISAs are invested relatively adventurously.

They'll need to bear in mind that the £12.5k annuity is going to erode in value over the years, so the cash, SIPP and ISA will probably be spent on topping that up.

I'm not sure an IFA could add much value to their situation, they appear to have invested / saved quite well over the years. and seem to have a realistic expectation of how much money they can spend in the future.

Without knowing how the investments are allocated it looks good.

The equities are mainly in tracker and managed stock funds with some single stocks for dividends. Yes thought IFA would be pretty pointless for them except maybe for inheritance tax planning but i fail to see what advice they would give that is not obvious (the obvious being: gifting, using SIPP and deed of variation for skipping a generation).

LHW99

Have you checked your mum's position, should your dad pass first?
Is she confident to manage their investments alone? If not, establishing a relationship with and IFA now may make things easier later.
Have they got LPA's in place?

itwasntme001

LHW99 wrote: »

Have you checked your mum's position, should your dad pass first?
Is she confident to manage their investments alone? If not, establishing a relationship with and IFA now may make things easier later.
Have they got LPA's in place?

If my dad were to pass first, half the annuity amount would transfer to my mum so she would receive about £6k a year. This on top of the £9k pension she will receive plus having access to over £500k in cash/equities not to mention a mortgage free home would mean she would be financially secure, no? This excludes my dad's SIPP and the inheritance he will receive.


No, have not got LPA in place. Is this worth doing at this stage seeing as they are "only" 64 and healthy?

AnotherJoe

That's the time to get it done! Not when they start having issues, especially if they are mental issues, eg dementia. By the time you notice and decide to act it may be too late and require costly court action But it could be something like a sudden stroke as well..

itwasntme001

AnotherJoe wrote: »

That's the time to get it done! Not when they start having issues, especially if they are mental issues, eg dementia. By the time you notice and decide to act it may be too late and require costly court action But it could be something like a sudden stroke as well..

Can you do it so that the LPA is ONLY effective due to the parent(s) medically not able to make their own decisions anymore?

Marcon

itwasntme001 wrote: »

Can you do it so that the LPA is ONLY effective due to the parent(s) medically not able to make their own decisions anymore?

Yes. The application form asks you to choose when it will be effective.

Do they have valid wills?

jamesd

itwasntme001 wrote: »

Any thoughts on what they could/should do differently, any areas of concern or any financial pitfalls they may encounter?

Could spending £61.5k a year improve their life in any way? They can afford it. What about £90k? Spending far less than they could enjoy looks like the main concern.

With 18k for two years until state pension age and say 150k for the move in the next two years I don't agree with the earlier suggestion that 325k in cash is too much.

After allowing for the 186k cash drawing they have 629k of investable capital. This can provide a probably lifelong income of either:

1. £20k on a 30 year planning time, 3.2% of starting capital increasing with inflation, expected to leave more capital at death than they started with 95% of the time. The 4% rule, constant inflation-adjusted income.
2. £31k on a 40 year planning time, 5% of starting capital, usually increases with inflation but skips that, takes extra cuts or adds more depending on the investing times they live through. Not less safe than 1, just using spending flexibility to be more efficient. Guyton-Klinger rules.

Both require at least 50% in equities, the specifics vary.

So with £30.5k guaranteed income and a prudent 31k variable vs 12k minimum and 20k minimum desired income, do your parents have any interest in exploiting their annual income capacity of £61.5k? Is there any way at all that spending more could increase their quality of life?

Higher starting levels are possible if there's lots of spending flexibility or the way spending normally declines as people get older are factored in. With these done, £80-90k a year initially and gradually dropping below 50k in their mid 70s wouldn't be unreasonable. I've disregarded your father's inheritance which could take annual spending capability above £100k now and keep it above 65k after age 75 if inheritance is before then.

Your mother may be more comfortable deferring claiming her state pension and drawing from the investments instead. Assuming it's 8.5k that would add 4.93k inflation linked and take her to 13.43k a year plus what she gets from his annuity. Enough to easily cover essential spending and a nice holiday whatever happens to the investments, so she can be relaxed about them.

Their position isn't merely safe, it's superb.