The Vine Family
Background
Fergus and Felicity Vine live in the North East of England. They own a house valued around £390,000 and this is owned as a beneficial joint tenancy. They have been married for 20 years and have no children together. Fergus has one 26-year-old son, Ethan, from a previous marriage.
Fergus is 57 and in good health. He married at 21 but divorced at 35, when he then met Felicity. He had a clean-break settlement and his ex-wife has no claim on his finances.
Fergus’s father is still alive and lives 10 miles away in his own property in Newcastle. He is a widower and at 84 still lives on his own. He has a number of health issues which are currently managed well. The property owned by Fergus’s father is valued at £270,000 and he has written a will that leaves this to Fergus and his sister Gillian. Gillian emigrated to Australia some years ago and now has Australian citizenship. Fergus is aware that any future care responsibilities for his father will likely fall primarily upon him and Felicity as his sister lives so far away.
Felicity’s parents are a little younger. Felicity is 51 and her parents are in their mid-seventies. They are both in reasonable health. They live in the South East of England in a small village on the outskirts of the city of London. They own a large house that has a current market value in the region of £1,300,000. They also have some jointly held cash based investments amounting to £205,000 and ISAs of £48,000 each. On the first death, Felicity’s parents would like to leave the remainder to the surviving partner. On second death they would like to leave as much of this as possible to Felicity and her younger sister Georgina upon their death. They are very keen that the “tax man should not have any of Felicity and Georgina’s inheritance” but do not know much about inheritance tax. They are aware they may have to pay tax but would like to mitigate this where possible. Felicity’s sister Georgina is unmarried with one eleven-year-old son James, Felicity’s nephew.
Employment and Pensions
Fergus worked for a private company in the North East from the age of 16 to 35, when he was made redundant. He contributed to a defined benefit pension scheme. He has 19 years of pensionable service and is due to receive his full pension benefits in 2022, when he will be 60. His latest statement indicated his annual pension to be £21,220 per annum in addition to a compulsory tax-free lump sum of three times this amount. This figure will increase in line with inflation. The total transfer value of his pension is £675,000. He no longer contributes to this scheme.
Fergus now works for the National Health Service with an annual salary of £29,750. He contributes to a public sector defined benefit scheme. Based on benefits accrued to date, his latest statement predicted an annual pension of £7,750 and a tax-free compulsory lump sum of three times this amount. This is also payable in full when he is 60. Fergus does not anticipate that his salary will change significantly between now and when he intends to retire at 60 and therefore for the purposes of planning for retirement, he bases any plans on these figures. Fergus is a keen amateur sportsman and would love to have more time to devote to training and competing so is very keen to retire as soon as financially possible. Fergus’s death in service benefit (life assurance) is £55,500 and a survivor pension would be payable to Felicity in this event.
Felicity is a Senior Lecturer at a local University. She has two pension schemes. She is a member of the teacher’s pension scheme. She contributes 10.2% of her annual salary of £51,700 to this. She is unsure how much her annual pension will be when she retires. She is aware that she has options in relation to the age she can retire from education and the size of the lump sum relative to the annual pension she can choose to take. She thinks that her pension provides for Fergus in the event of her death but is not quite sure. Her full pension will be payable at 67 but the scheme allows members to retire earlier than this but this has consequences to the pension payable.
Felicity particularly wants to know what her potential pension and lump sum would be at 60 and 67. She loves her job but does not want to be too old when she retires, especially as Fergus is older than her.
When Felicity was much younger, she was sold a private defined contribution pension. The total fund value is currently £79,680. She has not contributed to this scheme for many years but still receives her annual statement showing how the fund has grown. By the age of 65, this fund is forecast to be able to buy an annual annuity of around £3,000 per annum. Felicity is a bit disappointed with this value.
Both Fergus and Felicity are due to receive a full state pension at the age of 67.
Fergus and Felicity have heard about the 2015 pension freedoms in the media. They have discussed how it would be useful to access their pension funds for various purposes, including paying off the remainder of their mortgage. They have heard that the reforms allow individuals to access their pensions at 55 but do not know much else about the changes. Fergus has heard that it is possible to transfer his defined benefit schemes to a defined contribution scheme to take advantage of the reforms potentially allowing him to retire even earlier than he intends to.
Property and other assets
Fergus and Felicity have a joint repayment mortgage with Santander that they took out years ago. The current outstanding balance is £15,000 with around two years until the total sum is fully repaid. They currently repay £850 per month.
They have contents and buildings insurance but have no other insurance policies, other than those already mentioned and car insurance on their two cars.
Felicity owns a small house in the south of England that she bought when she was 26. She bought the house at the end of June 1995 for £67,000. She lived in it for 5 years but then moved away and just used the flat as an additional base when she visited her parents. She has recently put it up for sale for an asking price of £250,000. She does not know if she will have to pay tax on this capital gain. Felicity also has a painting that she was bequeathed by her grandparents that she intends to sell at auction this year. The probate value was £7,000 and she has been advised by an expert that it is now worth £23,000 and she hopes to realise this. Once both assets have been sold, she wants to use some of the money to build a fund to help provide a university education for her nephew James, as well as to help him with a small house deposit to buy a property in the future. She wishes to earmark £40,000 for this purpose. It is unlikely that Felicity’s sister Georgina will be able to help and Felicity is keen that James should not start life in too much debt. As such, she would like to develop a portfolio of investments to grow her money. She is happy to take on some risk but does not want to have to do much to manage the portfolio, as she is very busy.
Fergus was left £18,000 by his grandfather, when he passed away seven years ago. This is invested into £8,000 premium bonds, £3,500 cash ISA and the remainder in a savings account with a local building society. He has had one £25 win and made very little interest over the last seven years. Felicity has suggested he invests in something that will give a better return but Fergus is inherently risk averse. He has however thought that he may be willing to take on a little more risk.
Estate planning
Fergus and Felicity do not have a will. Both would like each other to inherit their assets when they die and have assumed this will happen. After both deaths, they would like Ethan and James to be provided for equally. They are not really sure if they need a will and both admit to knowing very little about them or the consequences of dying intestate. They are also concerned on the impact of ill-heath and making sure that if they are unwell, the other can make decisions for them.
Ethan
Fergus’s son Ethan lives with his mother. He has been saving for a deposit so that he can move out and buy a property locally. He is not sure on how to proceed. He has saved £6,000 with the help of grandparents. His gross salary is £26,000 per annum.
Other Liabilities
Fergus and Felicity have a car loan. They had to buy a car two years ago for £13,500, which they financed with a car loan paying £205 per month and this will not be padi off for another three years.
Felicity has £9,700 on a credit card. She only pays the minimum balance off this each month.
Income and expenditure
Fergus and Felicity have an approximate monthly net income of roughly £4,800. They do not wish to substantially change their lifestyle.
Assessment Tasks
You are to write a client report (2500 words) for the Vine family that covers the following:
A financial plan for Fergus and Felicity. (60 marks- see below for allocation)
You should make a judgement about the timescale of this plan, taking into consideration the financial milestones and factors mentioned in the case study.
It should include:
a. A clear breakdown of the couple’s objectives over the short, medium and long term. You should clearly show a financial plan that models the likely changes in the couple’s financial situation from now until the years to retirement, taking into account all of the information in the scenario (you may use excel for this and include as an appendices). You need to determine the key milestones that will change the couple’s income and expenditure between now and retirement and model how these will change their overall financial position. You should consider at least two alternative scenarios you judge possible given the ages of both Fergus and Felicity and their possible retirement ages. (Please note you are not required to re calculate the current net pay of the couple and should use the approximate estimate of joint net income in any projections). 10 marks
b. Specific advice regarding the 2014/15 pension reforms. You should make clear to the couple to which pensions they are relevant and what options the couple have as a result. You must provide specific recommendations for Fergus as to the final salary scheme transfer, including the advantages and disadvantages of transferring his defined benefit scheme to a defined contribution scheme.
10 marks
c. Advice regarding any issues mentioned in the case study in relation to capital gains and inheritance taxation (provide supporting calculations), estate planning and care planning (please note that Fergus and Felicity would like to know what the potential impact of care costs could be on their future inheritances). You are expected to use 2020/21 tax year in calculations. 16 marks
d. Based upon the couple’s risk profile, recommend two separate investment portfolios for Fergus and Felicity. You should consider the funds available, clearly showing where these funds have come from (exclude pensions from this). You should also attempt to model the performance of the portfolio and whether or not it is likely to achieve the goals you stated in part a (you may ignore inflation or justify your assumptions with regards to growth rates and inflation). 16 marks
e. Provide mortgage advice to Ethan. You should identify appropriate mortgage options and comment on their affordability as well as advising Ethan about other costs (both one off and continuing) of buying a property. You should calculate Ethan’s net pay and suggest a possible monthly budget that may help Ethan manage his money in the first year. 8 marks
You should state any assumptions that you make, but you need to ensure these are from robust sources. You need to identify any information that you would need to seek clarification on from Fergus and Felicity. You are the financial advisor and you should treat the information in the case as if it has been gathered from a first client meeting. Additional information and calculations should be included as appendices. However, these must relate specifically to the case study and support the financial plan you produce. Appendices or tables are not included in the word count.
