The situation:
Mrs P, in her late 60s, has a Stocks and Shares ISA, which she doesn’t ordinarily take notice of because her state pension and rental income cover her spending of approximately £30,000 per year.
Unfortunately, the property’s tenants of six years have moved out and she is struggling to find new tenants. Therefore, Mrs P felt that she now needed advice on how to manage her ISA because she needs to use the funds to replace the lost rental income. As she inherited the plan from her late husband, she doesn’t really know how ISAs work and how the plan is invested.
As part of our initial discussions, we established that drops in the stock market weren’t really a concern for her as she understands that investments should be long-term in nature
As part of our initial discussions, we established that drops in the stock market weren’t really a concern for her as she understands that investments should be long-term in nature. What keeps her up at night is the ongoing maintenance of the rental property and the worry of not having tenants. She is also very keen to support her two sons financially who have young families, but she has never felt that she could afford to do this.
The solution:
After discussing the pros and cons of doing so, Mrs P decided that she would sell her second property and use the proceeds to fund her retirement income (which was her main priority) and gift to her family where possible. As she had to pay Capital Gains Tax on the property sale, she was keen to ensure that the new arrangement was as tax-efficient as possible.
After discussing the pros and cons of doing so, Mrs P decided that she would sell her second property and use the proceeds to fund her retirement income (which was her main priority) and gift to her family where possible
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As a starting point, using cash flow modelling, we projected the value of her cash and investments over time when taking withdrawals to meet her income target of £30,000 per year. As this illustrated that there would likely be a significant value remaining on her death (for the purposes of the modelling we agreed that she will live to age 100), we projected different scenarios accounting for different levels of gifts to her sons and potential care costs.
We recommended that Mrs P invested the funds in an offshore bond within a Discounted Gift Trust (DGT) that would pay her a monthly income of £1,750 (£21,000 per year)
Following this work, we agreed that Mrs P would gift her sons £100,000 each, keep a cash emergency fund of £60,000 (2 years’ worth of income) and invest the remainder of the property sale proceed in a tax-efficient plan to provide her with a regular income for the rest of her life. We recommended that Mrs P invested the funds in an offshore bond within a Discounted Gift Trust (DGT) that would pay her a monthly income of £1,750 (£21,000 per year). In addition to her £9,000 State Pension, this would meet her income target of £30,000.
The results:
Although Mrs P now has a lot more exposure to the risks and volatility of the stock market, our cash flow modelling analysis showed that future market crashes are very unlikely to impact her ability to fund her retirement income, which provided her with great comfort. She also has her ISA available to use when required, e.g. for further gifting, spending or care costs, which she now knows can be accessed tax-free.
Mrs P will not pay any income tax on her withdrawals (tax is deferred until the bond is surrendered) and the investments within the bond will grow tax-free. In addition, due to the treatment of the DGT for inheritance tax purposes, some of the bond value will drop out of her taxable estate immediately, with the remainder dropping out after 7 years. This is a significant improvement from her previous arrangement where most of the rental income was taxable at 20% and on her death most of the property would be subject to inheritance tax at 40%.
This is a significant improvement from her previous arrangement where most of the rental income was taxable at 20% and on her death most of the property would be subject to inheritance tax at 40%
We significantly improved the tax-efficiency of Mrs P’s finances and more importantly gave her peace of mind that her investments should comfortably fund her spending throughout retirement, without the worry of tenants and ongoing repairs. Cash flow modelling also gave Mrs P comfort that she can make gifts to her children without impacting her ability to fund her income.
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