The Calm After the Storm (Financial Planning in the Wake of Turbulance)

Andrea, aged 54, was highly successful and earning a six figure salary in London.  She had become disillusioned with her high pressured job. She sought a better work/life balance so that she could devote time to pursuing her own passions. She wanted to split her time between London, where she lived, and being with her son and grandchild who lived some miles away.

She and her husband were also divorcing but wanted to do so amicably. In her words “I need future security but I also want to divorce amicably”.

Andrea and her husband had managed to accumulate savings, investments and pensions over the years and had also repaid their mortgage. However she was unsure about her financial capacity to change her life so dramatically, especially as she was approaching retirement age. She was worried about both her immediate financial position and the effect these changes would have on her short and long term financial position.  

In Detail

Andrea was referred to me by a long-term client. She had never consulted a financial adviser and her initial perception was that I would not be able to assist her during such a turbulent time in her life.

We corresponded by email and spoke on the phone. I was keen to reassure her that I could help but as Andrea was experiencing such change it was important that we liaised at her pace so that she was comfortable moving forward. She had major decisions to make. It was vital that I really understood Andrea before we even started talking about financials and we therefore took our time to discuss:

  • How she got to where she is now?
  • What vision she had for her future?
  • What past experience she had with money?
  • What was important to her?
  • What expectations did she have?

I was also interested to know what her husband’s expectations were for the divorce settlement. This insight would help me to assist Andrea and her solicitor to resolve the divorce as amicably as possible and make mutually acceptable financial decisions. The ultimate aim was to put a strategy in place that reflected what Andrea actually wanted from her life. I therefore needed to know what she expected from her money.  

After the initial conversations we agreed to meet in person but in the meantime we spoke on a number of other occasions. A ‘little and often’ approach helped Andrea to gain greater understanding and confidence.

By the time we met I had a reasonable idea of what she wanted to achieve but had given Andrea a few exercises to undertake prior to our meeting to help explore and refine what mattered most to her. I had also asked Andrea to bring along every one of her financial documents; this included the completed Form E’s, which would give me an overview of the matrimonial financial position. Eventually I would need to recommend a financial strategy so this information was vital too. 

The initial conversations I had with Andrea focussed on helping her to be positive so that she believed that her goals were achievable. The obstacles would be discussed later on but for now it was important that Andrea did not limit her beliefs before the divorce was finalised or before she knew what possibilities were available to her.

Andrea placed significant importance on ensuring that her “capital lasted as long as she did”, especially as she was still some way from her retirement age (65). However she didn’t want to live in fear of using some of her capital immediately to help fund her new life. In her words “…why live life tomorrow, when you can live it today?”

She was keen to split her time between ‘her London life’ and her “life as a mother and grandmother” however she was conscious that this could affect her earnings potential, especially if she spent significant time away from London, which was where her new consultancy business would have the best opportunity to thrive.  Her consultancy earnings were an important part of the financial transition between full time employment, semi-retirement and retirement.

In between our meetings and conversations, I analysed that Andrea had assets of some £250,000 in ISAs, £300,000 in shares and unit trusts, £650,000 in pensions and £350,000 in bank deposits. The jointly owned, unencumbered UK property was already sold for £1,650,000 and both parties had bought their own property with an equal share of the proceeds. Andrea had retained some £75,000 in bank deposits after buying a property for £750,000. The residual amount was earmarked for home improvements. Her husband had independent assets of some £200,000 in ISAs, a business valued at some £500,000, a deferred final salary pension with a CETV of £450,000 and bank deposits of £175,000. Her husband was keen to retain his business and final salary pension whereas Andrea was keen to have flexibility of capital and income.

Andrea completed an expenditure questionnaire which identified that she was spending all of her gross salary plus bonus, including making pension and ISA contributions each year and gifts to her son. When Andrea completed the questionnaire I also asked her to imagine what expenditure might look like for her new life. The questionnaire showed that her expenditure dramatically reduced from some £100,000+ pa to some £40,000 pa. We agreed to cease pension contributions for the time being, and for ISAs to be funded from her share portfolio rather than from her own savings. Andrea found this exercise, as with most of the other exercises I had asked her to complete, very cathartic. She was already feeling more in control of her financial future.

From my understanding of her husband’s position I was comfortable that Andrea had sufficient assets, based on an initial equal split of matrimonial assets, to help her transition from her highly pressured life to one that she dreamt of. It was also apparent that Andrea could achieve her required amount of income, a flexible lifestyle and longer term security, all whilst she built a new business and transitioned into retirement.

It was important that I helped Andrea to visualise this too, especially as so much of her life was susceptible to change.  We therefore agreed that I would create an overview of her potential future financial position (cashflow plan) based on various outcomes that she wanted to achieve.  This would help her to plan for tomorrow, today, whilst incorporating provision for obstacles and unknowns that could likely occur over her lifetime.

We also built a financial plan of Andrea’s current life with her husband. This allowed Andrea to understand the life she was currently living and use this as a benchmark for her new life.

We organised to meet every two weeks over an initial two month period to help us/Andrea to maintain momentum but also build in time for both parties to reflect on the discussions we were having. This worked tremendously well as I could see Andrea’s confidence build each time we met and it allowed me to adjust our planning accordingly.

During the eight week period we built various financial plans, assuming many outcomes for the divorce settlement, that stress tested her financial position under each varying circumstance and based on differing financial assumptions.  Andrea was subsequently fully informed and knowledgeable about her current and future financial position. Andrea and I were also able to liaise meaningfully with her solicitor so that the divorce could potentially be settled at the earliest opportunity.

Shortly after our work together Andrea created an amicable financial agreement with her husband that both parties were happy with. This meant that they could both move forward with their new lives.

It was agreed that both parties would retain their own assets with Andrea’s husband compensating her with an additional £75,000 to offset the benefit of him retaining his final salary pension. Andrea got to retain as much flexibility as possible whilst her husband retained his business and final salary pension. Andrea was very happy with the outcome both emotionally and financially. She was especially pleased that she had amicably resolved matters with her husband and could visualise her new life. She was more positive and less fearful of change, of making decisions and of her future.

Andrea retained £250,000 in ISAs, £300,000 in shares and unit trusts, £650,000 in pensions and had £500,000 in the bank. She owned her own property, worth £750,000.

We agreed that she would retain £200,000 in bank deposits to fund £75,000 of home improvements which left some two years worth of expenditure in short term deposits to help her transition to a new career and build her consultancy business. The remaining £300,000 in savings was earmarked to purchase a second property close to her son.

We analysed the possibility that a second home could also be rented out during the school holidays to generate an income for Andrea whilst she was in London. This would serve a dual purpose of being a home near to her son and also an income producing investment. Andrea liked this idea and pursued this opportunity.

She eventually purchased a property in a popular tourist area and signed up with a holiday letting agency. She had the potential to generate some £7,500+ pa income. The rest of the time Andrea was free to use the property to visit her son and help with childcare when needed. As her new career was flexible it meant that she could be in London to build her business and also, whilst she was living in her second home, she could still work on and maintain links to, her business.

Whilst the property was being sourced we performed a financial audit of Andrea’s policies to assess whether they were still fit for purpose. After our analysis, a number of remedial actions were undertaken to reduce costs, improve the structure of her investments and tax position and create the opportunity to provide capital growth and income in line with her risk profile. Her existing ISA, share portfolio and pension assets were out of sync with her new situation and goals. This was addressed to bring matters into line.

Andrea required income for when she resigned from her employment. As she could not access her pension for a further year we restructured her ISA and share portfolio to provide her with an income of some £20,000+ net whilst also adding significant diversification to her assets aimed at preserving capital and generating income. Andrea’s share portfolio had a small CGT liability, which we aimed to mitigate over multiple tax years by selling the proceeds within her annual CGT exemption and then reinvesting.

I recommended that Andrea move £125,000 into varying term deposits to fund the balance of her £40,000pa income need over the first two years of her transition if required. We earmarked her pension to fund some income after the first year when she reached age 55. We had discussed using parts of her tax-free lump sum entitlement and some taxable income to fund the amount of income she needed, which would efficiently manage her pension income tax liability. 

Andrea had estimated that she could generate consultancy income of around £20,000 pa and possibly increase this to £50,000 pa over the next three years. This, coupled with her investment income, would easily fund her lifestyle and provide for her long-term future.  Even so, she was under little pressure to create a business that generated significant earnings potential.  

Over the course of a few months, we had managed to help Andrea move from a state of flux to a life and financial position that had greater clarity, focus, structure, but flexibility too. It is always a privilege to be a part of a person’s life and to help them.

FOLLOW UP

As a result of our work, Andrea resigned from employment and is confident with what the future holds for her. She sees her son much more, enjoys a less stressful life and has more than enough income to satisfy her simpler needs.

We implemented a number of recommendations for Andrea that have improved her position and matched her needs. We regularly meet to ensure she is fully abreast of her financial position and that every financial decision she/we make is meaningful.

So far Andrea has not needed to access her pension as her consultancy business is thriving. Her holiday home is being let and, as expected, the income varies but is mainly consistent. In fact she is considering stopping the holiday let, such is her overall income position. She is continually making home improvements from the money we set aside for her.

She has so far been delighted by the planning we have put in place for her and has appreciated that we have acted in her best interests at all times. She is surprised by the relationship we have built and by how we worked together to achieve her goals.

Sam Whybrow CFPTM  Chartered MCSI

Cervello Financial Planning
 

Sam Whybrow
Certified Financial Planner, Chartered Financial Planner & Registered Life Planner

Sam is dedicated to working with people to give them every possibility of achieving their most sought after life goals. Working collaboratively with his clients he uses his financial acumen to ensure that every financial decision is clearly thought out, financially sound and meaningful. He is passionate about people receiving financial advice that makes a difference to their lives and that helps deliver the life they want. He believes that quality financial planning is first and foremost about people and then their money, a philosophy which delivers better outcomes for his clients.