Colin case study

Colin would like:

• to reduce his working hours from five days to four days a week;
• to pay off his credit card debt and some of his mortgage;
• to use some of his savings to offset the fall in his income;
• an adaptable plan and access to cash if something unexpected happens;
• to fully retire comfortably for the rest of his life.

Colin's retirement plan

This is Colin’s plan across five key stages in the early years of retirement and details where his income streams come from. Colin will have total DC pension pot of £300,000 when he comes to retire, which he will use a range of solutions at different stages of his retirement.

At age 60

At age 67

Colin now qualifies for his state pension providing him with further guaranteed income so he reduces the amount he is taking from his Defined Contribution (DC) savings as drawdown. Any emergency income he needs he takes from his Cash ISA.

At age 73

Colin and Jane are spending more time at home and their overall expenditure has reduced. Colin decides to only use his ISA savings as a ‘rainy day’ fund. All his other income is guaranteed for the remainder of his life, so he can enjoy the rest of his retirement knowing that his income needs should be covered.

Thinking inheritance

While there is money left in their ISA savings, they're keeping this for emergencies. So they decide to unlock some of the equity in their home.

They take out a lifetime mortgage on their property, which is worth £300,000. Based on a 35% loan to value, this provides them with an initial lump sum of £71,000 and access to a further £34,000 as a drawdown facility, if they need it.

They spend £11,000 on a family holiday and give £60,000 to their children and grandchildren to help them finally move into their dream homes, a sort of ‘living inheritance’ and an opportunity to see their family enjoy their money.

Colin's retirement plan provides with him

• Flexibility from the start.
• Guaranteed retirement income for the rest of his life.
• An ISA providing an element of safety for emergencies.
• A reduced Inheritance Tax Liability, by £71,000.
• Some peace of mind that although the lifetime mortgage was taken out against their property, they'll not be forced to repay the loan or move until they both die or move into residential care, at which point any outstanding loan and interest would be taken from the sale of the property.

If Colin's life takes an unexpected turn

Often, despite the best plans, life doesn’t quite work out as we expect it to.

In an alternative scenario, as Colin turns 65, he and Jane get divorced. They've agreed that Colin can remain in the home, and Jane will receive the ISA assets and a further payment of £90,000 in settlement from Colin.

So how can Colin manage this and his remaining finances?

Without the ISA savings, Colin can manage on the reduced savings if he tightens his belt a little. He doesn't want to leave his home just yet, but has no way of paying the settlement sum from his assets.

Colin decides to release some equity from his home. He takes out a lifetime mortgage for £100,000, which will pay the settlement and leave him with £10,000 as an emergency fund. By doing this, he can remain in his home for the rest of his life knowing that the lifetime mortgage will be repaid when he dies or if he needs to go into residential care. This gives Colin an element of optimism for his future.

In this scenario, Jane’s pension assets meant that he didn't have to further split his pension assets but this could also provide an option to support a client who has a pension sharing order.

Risks

All products mentioned in this case study have risks as well as benefits. The risks will be different for each product.

• The value of investments is not guaranteed and may fall as well as rise.
• If Colin flexibly accesses his pension savings, his annual allowance will reduce to £4,000 each year; this is known as the Money Purchase Annual Allowance (MPAA). It applies to any money he and his employer contribute to any pension plans he may have.
• If Colin chooses a fixed income from his lifetime annuity, it won’t increase in value. As a result, the effect of inflation will reduce the buying power of the income over time.
• A lifetime mortgage is a loan secured against the home. There may be cheaper ways to borrow money.
• A lifetime mortgage will reduce an inheritance.
• The recipient of a gift from a lifetime mortgage may have to pay Inheritance Tax in the future.