Richard Waldron says the potential divorce settlement leaves him 'distraught with worry' about his finances
CREDIT: HEATHCLIFF O'MALLEY
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Amelia Murray 15 MAY 2017 • 10:49AM
Making sure your money lasts as long as you do is a huge concern for most retired people. And a divorce in later life is likely to send many into turmoil as the division of a couple's assets can rock even the most financially stable.
This is the position in which 78-year-old Richard Waldron, a retired graphic designer, finds himself: he separated from his wife two years ago and is waiting for the divorce to be finalised.
The proposed settlement has left him "distraught with worry" about his financial future.
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At my age I cannot afford to be 'gung-ho'Richard Waldron
If it is accepted, Mr Waldron will be left with guaranteed annual pension income of about £16,300 after tax and £200,000 from the sale of the property he owned with his wife.
In addition, he has £11,000 invested in each of two Isas with St James's Place and Fidelity, which yield an income of about 3.5pc. He has another £11,000 in an investment run by St James's Place, which yields £100 a quarter, and £88,000 in cash in a high street bank account.
This gives him a total of £321,000 with which to generate extra income.
Mr Waldron is currently living with his new partner in the home she owns. He pays her £122 a week to cover the loss of her tax credits since he moved in and £65.60 a month for council tax.
Apart from these payments, Mr Waldron has few outgoings. He spends £3,000 a year to run his car and "a few hundred pounds" on annual membership of his local bowling club.
He is anxious that he has enough income to last him at least until he is 95. Ideally he'd like to top it up by an extra £11,000 a year.
Mr Waldron wants his money to last until he reaches age 95 CREDIT:HEATHCLIFF O'MALLEY
He describes himself as a "clueless but cautious" investor.
He said: "At my age I cannot afford to be gung-ho. If, for example, the market takes several years to recover from a crash, I would not have the time to wait for recovery as I would need money to live on."
Alistair Cunningham, financial planning director at Wingate Financial Planning, said:
I understand why Mr Waldron might feel unsettled, especially as his income will fall significantly after the divorce.
Before making any investment decisions he should consider an insurance policy that gives him the income he needs. A "purchased life annuity" would guarantee an income for life and remove the risk of living longer than expected. This would address his concerns about living to age 95.
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Official statistics suggest that there is reasonable chance of this, and the annuity moves this risk to an insurance company.
The lowest-cost annuity would be one where the capital was irrevocably lost after the policy was set up, in return for a guaranteed income.
Each annuity is individually underwritten, but assuming that Mr Waldron is in good health and does not qualify for a better rate on account of reduced life expectancy, a sum of around £200,000 would give him a guaranteed £11,000 a year, with inflation linking for life.
If he did not want inflation protection the cost could fall to £160,000.
A proportion of the funds paid are a return of capital and therefore tax-free. The rest would be taxed as income in the normal way.
At Mr Waldron’s age, the tax is likely to be only a few hundred pounds a year, depending on the option chosen. As with all annuities, rates are subject to change before they are set up (they are then guaranteed for life), but the sums I've quoted should give an idea.
It is possible to spend only part of your money on an annuity and secure a lower guaranteed income in return for smaller capital sum.
If Mr Waldron does not want to consider this option, which is the least risky to generate the income he wants, he should establish a suitable investment portfolio and move away from cash.
He said he had a “cautious” attitude to risk, which means only a small part of his portfolio, typically less than a third, should be in the stock market.
Over the longer term this would reduce the expected returns but increase the certainty of receiving them. I would expect this kind of portfolio to maintain pace with inflation, growing by around 3pc a year.
Making withdrawals of around £11,000 a year would, with typical investment performance, result in the fund running out in 20 to 30 years, but this is potentially longer than the time frame Mr Waldron is planning for.
At least the tax on any investment income should be minimal: he has a £20,000 annual Isa limit and should use this every year.
There would be little in the way of a safety net though; should the returns disappoint, or should he make larger withdrawals, he could find himself running out of money sooner. For this reason, I think the annuity looks appealing, at least for a level that meets all his basic and essential expenditure.
Five tips for managing your stocks and shares Isa
02:28
Anna Sofat, founder of Addidi Wealth, said:
The key issue Mr Waldron faces is how long can he make his money last. He has a number of options and should take time to explore them all.
He could, for example, leave the £200,000 proceeds of the house sale in cash. This money would need to be split between banks to ensure it is protected by the Financial Services Compensation Scheme, which covers £85,000 held in each institution.
If he takes this route I suggest that he deposits £85,000 in a one-year bond from Charter Savings Bank, which pays 1.55pc interest a year. Another £85,000 could be held in an easy-access account with Kent Reliance or Britannia, which pay 1pc and 1.1pc respectively. The remaining £30,000 could buy Premium Bonds from NS&I.
If Mr Waldron withdrew £11,000 a year from these accounts the funds would last comfortably until he reached 100 or more.
However, the biggest risk is that he would require long-term care.
A purchased life annuity would guarantee an income for life and remove the risk of living longer than the averageAlistair Cunningham, Wingate Financial Planning
Inflation and the rise in care costs are a concern. Care fees tend to rise more quickly than the general rate of inflation.
The cost of care could easily reach £45,000 a year. If Mr Waldron needed care and took £30,000 from his savings and £15,000 from his pension income, he could fund only seven or eight years. If he had to go into care at the age of 85 he would run out of money when he reached 93.
If he would rather not keep all his money in cash he could consider investing some of the funds. I’d suggest keeping £171,000 in cash and use this to boost his income by £11,000 a year. This would last him a good 15 to 16 years. He could then invest the remainder.
The key here is the level of risk he should take. I think he is right to be cautious. My recommendation would be 30pc in riskier assets such as shares and 70pc in less risky assets such as bonds. This portfolio should be able to provide returns in the region of inflation plus 1pc per annum over the medium to long term.
If he invested the remaining £150,000 along these lines it should grow to £170,000 in real terms by the time he turns 90. This should be able to fund long-term care for a good five to six years at £30,000 a year in today's money.
Such a split should provide some inflation protection while giving him certainty of income over the next 10 years or so.
Mr Waldron could use an investment platform such as AJ Bell Youinvest or Interactive Investor and invest in Vanguard's Lifestyle 20pc and 40pc funds. These figures represent the total of the funds invested in the stock market, so if he put £75,000 in each it would present an overall exposure to shares of 30pc.
www.fotavgeia.blogspot.com
Top 50 hotels in Spain
Our experts reveal the finest places to stay in Spain this summer. Read more ›
Amelia Murray 15 MAY 2017 • 10:49AM
Making sure your money lasts as long as you do is a huge concern for most retired people. And a divorce in later life is likely to send many into turmoil as the division of a couple's assets can rock even the most financially stable.
This is the position in which 78-year-old Richard Waldron, a retired graphic designer, finds himself: he separated from his wife two years ago and is waiting for the divorce to be finalised.
The proposed settlement has left him "distraught with worry" about his financial future.
Paid content
At my age I cannot afford to be 'gung-ho'Richard Waldron
If it is accepted, Mr Waldron will be left with guaranteed annual pension income of about £16,300 after tax and £200,000 from the sale of the property he owned with his wife.
In addition, he has £11,000 invested in each of two Isas with St James's Place and Fidelity, which yield an income of about 3.5pc. He has another £11,000 in an investment run by St James's Place, which yields £100 a quarter, and £88,000 in cash in a high street bank account.
This gives him a total of £321,000 with which to generate extra income.
Mr Waldron is currently living with his new partner in the home she owns. He pays her £122 a week to cover the loss of her tax credits since he moved in and £65.60 a month for council tax.
Apart from these payments, Mr Waldron has few outgoings. He spends £3,000 a year to run his car and "a few hundred pounds" on annual membership of his local bowling club.
He is anxious that he has enough income to last him at least until he is 95. Ideally he'd like to top it up by an extra £11,000 a year.
Mr Waldron wants his money to last until he reaches age 95 CREDIT:HEATHCLIFF O'MALLEYHe describes himself as a "clueless but cautious" investor.
He said: "At my age I cannot afford to be gung-ho. If, for example, the market takes several years to recover from a crash, I would not have the time to wait for recovery as I would need money to live on."
Alistair Cunningham, financial planning director at Wingate Financial Planning, said:
I understand why Mr Waldron might feel unsettled, especially as his income will fall significantly after the divorce.
Before making any investment decisions he should consider an insurance policy that gives him the income he needs. A "purchased life annuity" would guarantee an income for life and remove the risk of living longer than expected. This would address his concerns about living to age 95.
Show more
Official statistics suggest that there is reasonable chance of this, and the annuity moves this risk to an insurance company.
The lowest-cost annuity would be one where the capital was irrevocably lost after the policy was set up, in return for a guaranteed income.
Each annuity is individually underwritten, but assuming that Mr Waldron is in good health and does not qualify for a better rate on account of reduced life expectancy, a sum of around £200,000 would give him a guaranteed £11,000 a year, with inflation linking for life.
If he did not want inflation protection the cost could fall to £160,000.
A proportion of the funds paid are a return of capital and therefore tax-free. The rest would be taxed as income in the normal way.
At Mr Waldron’s age, the tax is likely to be only a few hundred pounds a year, depending on the option chosen. As with all annuities, rates are subject to change before they are set up (they are then guaranteed for life), but the sums I've quoted should give an idea.
It is possible to spend only part of your money on an annuity and secure a lower guaranteed income in return for smaller capital sum.
If Mr Waldron does not want to consider this option, which is the least risky to generate the income he wants, he should establish a suitable investment portfolio and move away from cash.
He said he had a “cautious” attitude to risk, which means only a small part of his portfolio, typically less than a third, should be in the stock market.
Over the longer term this would reduce the expected returns but increase the certainty of receiving them. I would expect this kind of portfolio to maintain pace with inflation, growing by around 3pc a year.
Making withdrawals of around £11,000 a year would, with typical investment performance, result in the fund running out in 20 to 30 years, but this is potentially longer than the time frame Mr Waldron is planning for.
At least the tax on any investment income should be minimal: he has a £20,000 annual Isa limit and should use this every year.
There would be little in the way of a safety net though; should the returns disappoint, or should he make larger withdrawals, he could find himself running out of money sooner. For this reason, I think the annuity looks appealing, at least for a level that meets all his basic and essential expenditure.
Five tips for managing your stocks and shares Isa
02:28
Anna Sofat, founder of Addidi Wealth, said:
The key issue Mr Waldron faces is how long can he make his money last. He has a number of options and should take time to explore them all.
He could, for example, leave the £200,000 proceeds of the house sale in cash. This money would need to be split between banks to ensure it is protected by the Financial Services Compensation Scheme, which covers £85,000 held in each institution.
If he takes this route I suggest that he deposits £85,000 in a one-year bond from Charter Savings Bank, which pays 1.55pc interest a year. Another £85,000 could be held in an easy-access account with Kent Reliance or Britannia, which pay 1pc and 1.1pc respectively. The remaining £30,000 could buy Premium Bonds from NS&I.
If Mr Waldron withdrew £11,000 a year from these accounts the funds would last comfortably until he reached 100 or more.
However, the biggest risk is that he would require long-term care.
A purchased life annuity would guarantee an income for life and remove the risk of living longer than the averageAlistair Cunningham, Wingate Financial Planning
Inflation and the rise in care costs are a concern. Care fees tend to rise more quickly than the general rate of inflation.
The cost of care could easily reach £45,000 a year. If Mr Waldron needed care and took £30,000 from his savings and £15,000 from his pension income, he could fund only seven or eight years. If he had to go into care at the age of 85 he would run out of money when he reached 93.
If he would rather not keep all his money in cash he could consider investing some of the funds. I’d suggest keeping £171,000 in cash and use this to boost his income by £11,000 a year. This would last him a good 15 to 16 years. He could then invest the remainder.
The key here is the level of risk he should take. I think he is right to be cautious. My recommendation would be 30pc in riskier assets such as shares and 70pc in less risky assets such as bonds. This portfolio should be able to provide returns in the region of inflation plus 1pc per annum over the medium to long term.
If he invested the remaining £150,000 along these lines it should grow to £170,000 in real terms by the time he turns 90. This should be able to fund long-term care for a good five to six years at £30,000 a year in today's money.
Such a split should provide some inflation protection while giving him certainty of income over the next 10 years or so.
Mr Waldron could use an investment platform such as AJ Bell Youinvest or Interactive Investor and invest in Vanguard's Lifestyle 20pc and 40pc funds. These figures represent the total of the funds invested in the stock market, so if he put £75,000 in each it would present an overall exposure to shares of 30pc.
www.fotavgeia.blogspot.com
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