What do you do when there is not enough money?

Joey_Soap · 10 February 2018 at 9:57AM

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.

[purplesignup][/purplesignup]

ProDave · 10 February 2018 at 10:52AM

How old are they? I am assuming over 55?

The £180K pension pot. Put that into a drawdown SIPP. Take the 25% tax free straight away, that's £45K tax free available now (assuming they are over 55)

The rest can remain in drawdown to be withdrawn as needed.

Make sure wills are in place so th estate of the one with the illness passes to the other. Someone else will have to advise of the exact tax position of the remainder in the drawdown SIPP

Do NOT buy an annuity with that pension pot,. all or most of it will be lot on death.

No mention of state pension. That will be a big chunk of the required income

In ultra simple terms, £180K in the pot and £1000 per month income needed = 15 years income before you allow for growth of the invested sum and the state pension reducing the actual income needed from the pot.

Malthusian · 10 February 2018 at 11:24AM

Obviously one of them being terminally ill is a dire circumstance in itself, but other than that I don't agree their position is dire. The healthy partner is probably not in a position to retire now (though without their age and full SP position it's not clear) but do they even want to?

Doing nothing for the rest of their life may be a poor choice psychologically as much as financially.

Without going into numerical detail, if they work until State Pension Age they should be able to comfortably live on £1000 a month. The main question is whether that's realistic.

They can afford financial advice. IFAs will quite happily provide full advice in exchange for a reasonable initial and ongoing percentage of an £180k pension pot. Obviously if they are confident enough to DIY with or without your assistance that cost may not be necessary. However the consequences of a bad decision potentially outweigh the cost of an IFA by an order of magnitude.

As Dave said, for the ill partner to buy an annuity is not on the table. The partner can inherit the fund either as a pension or as a tax free lump sum (assuming death before 75). Make sure the expression of wish is up to date.

Joey_Soap · 10 February 2018 at 11:31AM

Thanks, just to be clear, it is currently 11 years to state pension age for the survivor who will have to contribute for the full 11 years in order to get a full state pension. I have no intention of having an IFA leach off this person if I can possibly avoid it. If this person takes a 4% draw down in 11 years time there is no way on this earth I want an IFA getting perhaps 25% of that as an ongoing "service" either now or in 11 years time when the draw down starts. Thanks very much for the input, it is helpful.

happyandcontented · 10 February 2018 at 11:33AM

I think this information may be useful.

https://www.pensionsandannuities.co.uk/Terminal_Illness_and_Pensions.htm

Linton · 10 February 2018 at 12:31PM

I think your general srategy is correct, but your relatives could make some useful returns from the initial £70K....

Two methods which could perhaps be combined in some way....

1) Since half the £70K wont be used for over 5 years they could consider some cautious investments rather than cash for that money.
2) It could be worthwhile to establish a ladder of fixed rate deposit accounts even at current interest rates. To do this they would put £6K aside for immediate use and then £12K in each of a 1 year, 2 year, 3 year, 4 year and 5 year fixed rate deposit account. As each matures they use £6K+interest for use that year and reinvest the other £6K+interest into a further 5 year account. In this way they will get maximum advantage of the highest interest rates avalable from fixed term deposits. And each year they will get the opportunity to put money away at the then available interest rates.

atush · 10 February 2018 at 1:08PM

I have no intention of having an IFA leach off this person if I can possibly avoid it.

IFAs are NOT leaching off their clients. They assist clients. I think you are being completely unfair and dont understand the work.

They could apply to take the entire 180K now, as the person is termianlly ill. Or they could leave it where it is for the dsurvivor to inherit 100% tax free.

If going into DD I would use an IFA as it doesnt sound if either of this couple know anything bout finances and investing. And you dont sound as if you know much more.

If buying an annuity, they should buy one AFTER the death of the terminally ill spouse as then it would be a single life annuity.

If this person takes a 4% draw down in 11 years time there is no way on this earth I want an IFA getting perhaps 25% of that as an ongoing "service" either now or in 11 years time when the draw down starts.

Ongoing advice for DD can cost as llittle as o.5% up to around 1%, not anything like 25%. Where did you get that ridiculous assumption from?

Joey_Soap · 10 February 2018 at 1:16PM

atush wrote: »

IFAs are NOT leaching off their clients. They assist clients. I think you are being completely unfair and dont understand the work.

They could apply to take the entire 180K now, as the person is termianlly ill. Or they could leave it where it is for the dsurvivor to inherit 100% tax free.

If going into DD I would use an IFA as it doesnt sound if either of this couple know anything bout finances and investing. And you dont sound as if you know much more.

If buying an annuity, they should buy one AFTER the death of the terminally ill spouse as then it would be a single life annuity.

Ongoing advice for DD can cost as llittle as o.5% up to around 1%, not anything like 25%. Where did you get that ridiculous assumption from?

You are an adviser, I presume? Kindly refrain from the insults.

It's no business of yours, but I do very successfully run several SIPP portfolios for my immediate family.

I repeat - I will not allow an IFA to leech money away from a relative who cannot afford to keep the typical adviser running his Mercedes E Class as they all seem to do.

Please do your maths - 25% of 4% is 1%. Leaving my relative with 3%. The other 1% goes towards the Mercedes.

Joey_Soap · 10 February 2018 at 1:18PM

Thank you very much to the contributors who have something positive to say, it is very helpful and I appreciate the input.

LHW99 · 10 February 2018 at 1:39PM

there is no way on this earth I want an IFA getting perhaps 25% of that as an ongoing "service"

They do not have to sign up for ongoing service

Thrugelmir · 10 February 2018 at 1:49PM

Joey_Soap wrote: »

1. 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.

2. It seems to me that a transfer of the DC pot to a SIPP is essential, urgently in fact, to protect the capital.

3. 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.

4. At a return of say 5% the pot should grow to about £190,000 in the 11 years, as long as it remains untouched.

5. 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.

1. Seems perfectly reasonable to do so. Despite what this board may suggest many people in fact do this.

2. For the size of pension pot. Not neccessarily.

3. Why only 67 hours? That's less that 16 hours a week. Also you overlooking auto enrollment and the ability to accrue further pension through working.

4. That's subjective. The 5% figure is based on the average since records began. Over 100 years in fact. Assuming the next 11 years are going to is unquantifiable.

5. I'd wait until the time arrives and see what the pot is worth. What the investments held are. Much discussion on safe withdrawl limits. The only certainty is that there's no precise science. To achieve the desired return. You may well need bonds (Gilts) to offer a much higher income stream.

but I do very successfully run several SIPP portfolios for my immediate family.

Over confidence in one's own abilities is the downfall of many an investor. Particularly on the back of 30 year bull market in bonds and a decade in equities. A chimp throwing darts into a newspaper listing funds could well have produced a high return on a portfolio. Corrections shake the tree so to speak. Interesting times lie ahead.

What do you do when there is not enough money?

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