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  • FIRST POST
    • Joey Soap
    • By Joey Soap 10th Feb 18, 8:57 AM
    • 159Posts
    • 50Thanks
    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 4
  • jamesd
    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.
    Originally posted by Linton
    Guyton-Klinger takes income first from cash (some is acquired by selling during up times), then bonds and if both of those are exhausted, equities. So the only time a person could be left with no cash is when there's nothing left, during the time it takes to sell and withdraw or a typical emergency fund event. So the cash requirement is a normal emergency fund plus a few months to smooth and provide a buffer while withdrawing.

    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.
    Originally posted by Linton
    You do if you're trying to maintain a level inflation-adjusted income for life but that's not the need here. Instead, this need is higher income with capital drawing to boost income until state pension age followed by a more sustainable inflation-adjusted one.

    So I wrote orf both deliberately not allowing for inflation and the option of using some equities for that when desired.

    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.
    Originally posted by Linton
    As I've explained, neither is too optimistic because of the low cash need and ability to choose the desired mix of capital drawing or sustaining.
    • Thrugelmir
    • By Thrugelmir 12th Feb 18, 2:59 PM
    • 58,925 Posts
    • 52,250 Thanks
    Thrugelmir
    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.
    Originally posted by jamesd
    I bow to your superior knowledge. Can I ask what your background in finance is? SME, Venture Capital, PLC or from working in the Accountancy profession.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • laurenzo
    • By laurenzo 14th Feb 18, 12:22 AM
    • 24 Posts
    • 26 Thanks
    laurenzo
    I donít appreciate the adviser bashing, maybe not everyone could see the value in whatever your profession is either but that doesnít mean it isnít valuable to plenty of people. for example good luck correctly working out how to extract money from a bond - via segment surrender or via withdrawal across all segments, might appear the same to you but have seen it cost thousands in tax to someone who doesnít know what they are doing

    How old is the ill person as their age at death affects the tax treatment of the inherited pension, if it has not been accessed and they die pre age 75 it is fully tax free to the recipient but the rules re death post 75 are different
    • laurenzo
    • By laurenzo 14th Feb 18, 12:41 AM
    • 24 Posts
    • 26 Thanks
    laurenzo
    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.
    Originally posted by Joey Soap


    If you donít factor in some sort of inflation measure the person will lose out in real terms knocking all of your calcs out so it is essential to do so
    • Hopefuljoy
    • By Hopefuljoy 14th Feb 18, 9:12 AM
    • 321 Posts
    • 3,782 Thanks
    Hopefuljoy
    Hello, I have read through these postings and I have a number of concerns for your relatives and for you. First I am not an IFA or connected to the financial industry. I have only met with an IFA once and that was for a different and less complex matter. My personal experience was excellent.

    I have researched the qualifications needed to give pensions advice and discovered that there are a series of intensive exams to go through before an independent IFA is able to advise on pensions. Clearly this is a complex area and in.spite of my money saving credentials I would hesitate to give advice on a pot of money which has to potentially last another 40 years. My father was a trustee of a huge company pension scheme for over 20 years, is a Chartered Accountant and even he refuses point blank to give pensions advice to anyone. I am not sure how or why you feel you are better qualified other than by having confidence and some personal experience with your family funds. This simply cannot compare to training and professional qualifications in such a difficult area.

    An IFA can give advice for a one off fee and it is up to the individual whether they proceed with the IFA. This seems to me to be a prudent way forward. You and your relative could gain knowledge without risk and then your relative could.decide which way to go.

    Your relatives are undoubtedly going through a stressful time and while I commend the fact you will sit down with them and help with finances and can see that you want to help them I urge you to reconsider taking this responsibility on your shoulders without professional help. It is simply too important. Clearly they have worked hard and one of them faces the imminent prospect of bereavement, job seeking and making their way on their own. This must be about optimising their financial future and sometimes there has to be an upfront payment to get the best.

    Finally, they have not 'sailed along blissfully for years'. You said yourself that they have managed on low incomes and only have a small personal loan outstanding. One of them has prudently saved a proportion of their low income into a defined benefits scheme and the survivor can easily and inexpensively increase their National Insurance contributions to make sure they get the maximum amount of state pension. The pension will pay a survivors pension so the partner has ensured they have done their very best to look after their partner. Thecsurvivor can work and I suggest that they will not necessarily need to draw any pension at all until they reach retirement age and can then draw their own pension which they will have built up in employment, plus state, plus survivors.

    These relatives have done their best with little. I respect them for it and I think you should too.
    Last edited by Hopefuljoy; 14-02-2018 at 9:29 AM.
    This is not the end, it is only the beginning of the end....
  • jamesd
    If you donít factor in some sort of inflation measure the person will lose out in real terms knocking all of your calcs out so it is essential to do so
    Originally posted by laurenzo
    All it does is produce a drop in the real inflation-adjusted value of the remaining pot and any income not increased by inflation. In this case it's desirable to draw on capital in the years before state pension age. So useful to consider inflation in planning but it doesn't mean they are losing out, it's just an extra bit of capital real value reduction to allow for. Of course an IFA suitability report would need to cover the issue.

    for example good luck correctly working out how to extract money from a bond - via segment surrender or via withdrawal across all segments, might appear the same to you but have seen it cost thousands in tax to someone who doesnít know what they are doing
    Originally posted by laurenzo
    I've seen reports of providers letting people do partial encashment of all segments of their investment bonds without questioning. A horrendously expensive mistake compared to full encashment of some segments or taking just 5% or some efficient permutation. It also proved expensive for Prism Financial Advice to advise full encashment when the FOS ordered them to pay a customer £4,389 for having done that with insufficient analysis.

    Fortunately most IFAs unfamiliar with P2P are unlikely to try giving unregulated which platform or regulated if for remuneration individual loan contract advice.
  • jamesd
    One of them has prudently saved a proportion of their low income into a defined benefits scheme
    Originally posted by Hopefuljoy
    "defined contribution pension pot. The value of the pot is about £180k"

    The pension will pay a survivors pension
    Originally posted by Hopefuljoy
    If it was defined benefit it might not provide a survivor's pension, the default annuity offered by the DC provider would but it's likely to be a standard annuity not making any allowance for the short life expectancy of the primary individual and hence paying far less than a sole policy in the name of the survivor. Likely considerably less than half as much.

    These relatives have done their best with little. I respect them for it and I think you should too.
    Originally posted by Hopefuljoy
    The one with the pot seems to have done really well on a low income. Far more than a typical pot.
    • wurley
    • By wurley 19th Feb 18, 11:56 AM
    • 75 Posts
    • 76 Thanks
    wurley
    CAB all the way
    The first port of call should be the CAB... I've been through their training and this is something they are able to help with. Make the appointment and bring all their financials - There are likely routes that you don't know about to get more help. They will know of these. Find a reputable office.

    Pensions is an area that has many pitfalls for even the most experienced Googlers to get wrong.

    Just for the record CAB are not financial advisers.
    Last edited by wurley; 19-02-2018 at 12:00 PM. Reason: Additional info
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