Our latest case study features someone who has already stopped working, but whose business interests remain precarious. They also have a lot of their wealth sitting in uninvested cash...
Age : 61 single
Kids & ages : 32,39, left home
Earnings:
Salary : £10k PAYE, £9k directors dividends
Monthly spending £1000 essential, £1600 inc hols, clothes sinking fund etc
Monthly spare gap for saving £0
Work pension
Current work Nest pension £3k pot
Regular contributions £21.20
Employer match details 3%
Balance £3,600
Regular contribution 5%
Provider NEST
Funds : Nest retirement date fund
Former work pensions:
Balance £17,109 (not accessed)
Provider Aviva
Funds : Aviva Pensions Mixed Investment (40-85% Shares) S2
Currently receiving £150 pcm combined from old DB pensions
Personal pension/SIPP: None
S&S ISA savings: £0
Cash ISA savings:
Balance £45k
Regular contribution £0
Provider Virgin/Principality
Interest rate 3.5%
Lock-in period : none
Balance £29,600
Regular contribution £0
Provider Halifax
Interest rate 4.25
Lock-in period March 2026
Balance £83,600
Regular contribution £0
Provider : Skipton
Interest rate £4.15
Lock-in period march 2030
(can only be released to bank acc losing ISA status)
Premium bonds balance £11k
Other cash savings balance £150k
Emergency fund balance, and is this included in anything above such as premium bonds or cash savings? £40-£60k (see below for reason)
Debts £0
Own home:
Value £350k
Mortgage balance outstanding £0
Anticipated inheritances : mother age 88, approx £150k -£200k if no care home fees
Goals
Retire early?
Up/Downsize house? No
Gifts to kids? No
Aged 45 & in a long term relationship we had a definite future investment plan, a business each, only 2 yrs mortgage left, we would then retire age 55/60 respectively on £1.5 million combined pensions/investments. And then along came ‘life’ & screwed the plan completely.
Reality : Relationship break up at 49, needed to buy myself a house, house paid in cash.
Age 51 : Long term health condition plus pace of work results in a physical burnout, at 7.5st (47kg/105lbs) I’m told to stop work or suffer the consequences. Part time not logistically possible. Business partner can’t afford to buy me out so it’s agreed I will step away & get a third of usual income as I need to be replaced by extra staff.
5 yrs self funded volunteering in 3rd world (truly my happiest time ever)
Along comes Covid then caring for father until he died. Another health burn out.
Suddenly I’m 61! With no private pension or investments.
I need the best strategy to invest my income into a Sipp /S&S ISAs as dividends don’t qualify with income to put into a pension. Business partner not keen on paying me wholly as PAYE as it doesn’t benefit the company. He’s open to considering PAYE plus directors pension payment but that doesn’t get govt contribution to benefit me? (If director's pension payments need to be equal he can only spare £600 a month from his income, spends personal money like water
) Business partner age 50, one heart attack this year. Cannot afford to retire until 57. Need 2 -3 years cash buffer (£40k-£60k) in case he croaks it suddenly. Business sale will hopefully bring £150k after cgt.
John
No one is coming to save you
You have taken your eyes off your
own financial future for too long. It's recoverable but the fundamentals are
currently lacking. You need to learn the basics and spend some time and energy
in fixing this. Most of all you need to develop an investor mindset.
It’s not all bad news
I calculate using the 4% rule and
bridging formula that you need about £300K invested to retire now
on £1,600 per month, assuming full state pension in 6 years.
Fortunately, you appear to have over
£300K, with potentially more in the future. Unfortunately, most of it is in
cash or default pension funds, and some of it is locked away. You need to
understand basic index investing to take the next step and get that money
invested sensibly. I would consider following a free course like Rebel Finance
School to learn the basics.
You will also need to understand efficient
drawdown in due course. But that’s a task for after the fundamentals are in
place.
If you don’t have full state
pension, then buy whatever years you can. I believe you can do that cheaply as
a business owner.
Incidentally, I didn’t think you
could fully refuse to release an ISA by ISA rules, though you can make it a painful
loss of interest. I would double check the small print on the 2030 locked ISA.
Misunderstand pensions at your peril
There's some misunderstanding of director's pension here. Direct
company contributions from pre-tax profits, avoiding all income tax and
employers and employee NI, are the most efficient pension there is. But only
for income that would be above the personal allowance. For income under the
personal allowance, it’s mathematically better to contribute personally.
As you earn £10K you could personally contribute £8K to a
SIPP and get £2K tax relief automatically.
If you instead take £12.5K PAYE and get the rest as
directors pension, then I would strongly consider doing that. Also, as instead
of taking dividends which are incurring corporation tax you would have slightly
more for your directors’ pension payments which are pre-tax. Then also put £10K
into a SIPP personally and get £2.5K tax relief.
I would strongly consider doing this while still working and
live off cash reserves. I would not use NEST for this.
I consider NEST a poor choice of pension provider as it has
a massive 1.8% contribution fee and a limited range of poor funds. I would use
a low-cost retail SIPP provider instead.
I would also strongly consider consolidating your pensions
on one retail platform for ease of administration and likely lower fees.
Mike
The interesting fact about this person’s finances is that
there are hardly any of the income-providing investments you would expect to
see for someone of that age and a huge proportion of their wealth is in cash.
There is some good news in that the mortgage is fully paid
off and there is a healthy ‘emergency fund’ of £11,000 in Premium Bonds. There
are maybe some good reasons for the state of the finances in the person’s
recent history, but rather than dealing with them here we will need to start
from scratch with the existing financial situation.
The desired spending level of almost £20,000 per year looks
high compared to the actual income from work and lack of any investment income.
But a regular salary does at least provide some opportunity for tax-efficient
investment in pensions.
Being the director of a UK limited company and paying
pension contributions into a self-invested personal pension (SIPP) is one of
the most efficient ways of investing for retirement anywhere in the world.
The first suggestion I would make is to talk to a good
accountant and come to an agreement with the other director to reduce the
salary and dividends and to use as much of this money as possible instead for
SIPP contributions. Establishing and paying into a SIPP is going to be by far
the most tax-efficient way of providing for retirement here.
The current Nest pension is not going to a good use of income
from the company and my suggestion would be to close this immediately and move
the proceeds into the SIPP established above. With this invested in a simple
low cost global index-tracking fund, along with the regular contributions, it
will provide an inflation-proof income for the future.
The existing Aviva pension could also be moved into the SIPP
but this will depend on the range of funds and fees associated with it. At the
very least, this fund should be moved to a more share-based fund in place of
the existing one.
The cash in the Virgin and Halifax cash ISAs should also be
converted into stocks and shares ISAs and invested in similar broad global
index-tracking funds. The money in the Skipton account is probably left where
it is for the next five years, but it may be worth investigating what penalties
would apply if the money were released?
A portion of the additional £150,000 in cash could be placed
into a savings account and used to fund living expenses, allowing greater SIPP
contributions and a smaller income to be taken from the company. The remainder
would be invested – first in a general investment account (GIA) and from here
£20,000 transferred each year into an individual savings account (ISA). In both
accounts the money would be invested in one of the global index trackers
mentioned above.
In this way the subject will gradually build up a SIPP, GIA
and ISA all containing productive assets to complement the very small income
from the existing defined benefit pension.
In time the business may be sold, which would impact the
salary and SIPP contributions, but the resulting proceeds could be used in a
similar way to the cash above, with some to live off and some invested in the
GIA (and from there to the ISA) to provide income.
The actual amounts involved would need to be tuned to fit
the spending patterns and the arrival of the state pension should reduce the
need to draw down so much from the accounts.
Tax may be liable on the capital growth in the GIA for the
first few years, but as the contents get transferred to the ISA this should
disappear.
Once the subject retires, a tax-free portion of the SIPP can
be ‘crystallised’ and moved into the ISA allowing a tax-free income of £12,570
(currently) per year from the resulting taxable pension pot and supplemented
(if there is enough) with additional tax-free income from the ISA.
Andy
As you are effectively retired already, I think the goal here is to find a way to employ your capital to give you safety in case the business goes belly-up due to your business partner's health.
Yes you don't have much in the way of private pension or investments, but you do have a fair amount of raw capital built up which could be put to work. I make it £389k, made up as follows. Cash ISAs £158k, DC pensions £20k, Premium Bonds £11k, Cash as emergency fund £40-60k (which is a bit vague but I'll go with £50k for my maths), and Other Cash £150k.
I'm going to plan what could happen if you got your existing capital invested into global index funds now, making it productive.
I see you think the Skipton Cash ISA can't be moved whilst maintaining its ISA status. Looking at Skipton's 5 year Cash ISA terms & conditions, I think you are reading the section about Withdrawals being only to a bank account. There is a further section on Transfers which suggests that this ISA can be transferred to another, as I would expect.
Spending is £19k.
Your State Pension is due to begin in 6 years at age 67. This is great news. It means that in our worst case scenario of your income ceasing now, we only have to fill your full £19k spending from the investment pot for 6 years. After that the State Pension does most of the lifting, and you'll only require a £7k top-up from the investment pot.
If we assume that you can safely withdraw 4% per year from a global index fund investment pot on a long-term basis, that means a pot of 25 x 7 = £175k will be needed at age 67 to give you the boost beyond State Pension. This pot will have 6 years to grow from now before it is needed. Doing a bit of magic with a compound interest calculator, I think that means it actually only needs to be £115k today, if you get average investing conditions during those years, but to play it safe having a bit more invested would be ideal. Let's say you play it cautiously and put in the full £175k now.
If we take the £175k from your current £389k of potential investments, that leaves £214k available to fund an earlier retirement. That seems a healthy sum to get us through 6 years - we could do it just by staying in cash, and as for the possible investment returns, running it through the Firecalc stress test tool shows that it would never have been a problem in any historical scenario.
If you were simply to invest all of your funds in a global tracker, the stress tester says that there is no past retirement year, and subsequent series of market returns, which would have led to portfolio failure before you reached the age of 100. This is pretty cast iron reassurance, as that stress tester includes some unusual and rare situations. Reaching 99% safety is relatively easy but getting to a full 100% safe (as your situation is) requires a lot of extra money in the portfolio.
In fact, you could raise your spending to £21k and still be 100% safe to age 100. A more relaxed goal, say 99% safe to age 95, would allow you to raise your spending to £23k. And that's before you take any action to boost your pot.
Boosting the pot
Much of your money is already tax-sheltered within ISA wrappers, which is great in terms of future growth being protected from tax.
Yes you could make contributions to a pension, and alongside this you can get your existing pension pots working harder. Neither Aviva nor Nest are great, and I suggest looking at transferring these pots into a SIPP and investing in a global index fund.
Your business can make company contributions to your pension. Since this comes before corporation tax I believe this is more efficient for the company than paying you in dividends or PAYE. There is no requirement for a similar payment for your partner, and yes paying into an owner's pension is considered reasonable in terms of the company's aims.
As this is before any personal tax has been paid, there is nothing to reclaim. This is a nice efficient way of doing it. It is already paid gross, so there is nothing to gross back up. It isn't limited to your earnings, just to a cap of £60k per year which won't be a problem in this case.
As your income was already quite tax-efficient, making use of dividends, the gain won't be quite what it was for an ordinary person on PAYE, but I think there's still a win from making use of your pension.
It may be that the saving in corporation tax means that the company can afford to contribute a little more than it was previously paying you through dividends and PAYE. Your bookkeeper or accountant may be able to assist here in seeing what you were previously costing the company, so that you can continue to benefit to the same degree.
I would want most of your remuneration paid to your SIPP, and while you do this use your existing cash to cover your living costs. If you end up with some pay in PAYE, it would gain tax relief from going into your SIPP, even if this pay is below the £12,570 Personal Allowance - you would be getting tax relief on money which hadn't been taxed. Lovely! Eating down your non-ISA cash funds to fund your living costs whilst you do all of this will still benefit you.
A goal of getting all the money that you can into tax-sheltered accounts would be a good one. You are pension-light so building up your pension pot is a good goal. It looks like you also try to max out your ISA allowance each year, and I would continue to do so. It will reduce the tax that you are paying on interest from your non-ISA cash, and if this wealth gets properly invested it will also reduce the tax that you pay in terms of Capital Gains Tax and Dividend Tax on investments which sit in a General Investment Account.
Action Points
Here's what I would do in your shoes:
- Transfer existing pensions to a SIPP
- Transfer existing Cash ISAs to a S&S ISA
- Move existing cash to a General Investment Account
Cheapest platforms for this may be Vanguard for the SIPP and Trading 212 for the ISA if you want to keep costs to the minimum. If you prefer a one-stop-shop with a customer helpline and full range of services, consider Interactive Investor.
- Keep the comfort blanket of a cash buffer uninvested (say one year's spending, £19k) but otherwise get your wealth invested in a way which stops you missing out on money.
- Switch your company earnings to a company contribution to your SIPP.
And Then What
You're going to have surplus capital.
In reality, you are going to continue to get income from the business for some period of time. Then you expect to get around £150k windfall once the business is sold. Thirdly, you're going to get a bit of boost from using pensions more. And fourthly your investments are extremely likely to see gains above and beyond the stress-test scenarios I've used above.
Your future is secure; you can relax and start to think about either gifting or increasing your spending.
As you have remained invested in cash until now, I imagine it will be a struggle to invest your wealth. But I feel you will be much safer that way, guarded by wealth held in productive assets, as opposed to zero return cash which is prone to inflation.
I expect you will only really feel comfortable when you reach State Pension age, and your withdrawal rate from your investments drops to quite a low level. It's quite likely that your investments will have reached around a million by that point, if the business were to limp along until your business partner reaches 57 and is sold at that point, and this would take your withdrawal rate to under 1%.
I think an ultra-safe withdrawal rate is around 3.5%, and I'd personally set a minimum withdrawal rate of 2.5% to ensure that some use is being made of the wealth rather than it just rolling up forever. In your case this may mean you have a surplus on the order of £15k a year at this point. You can afford to do more of what you enjoy, whether that's travelling more, volunteering, or gifting some wealth to your kids.
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