Financial Planners (New),
Joint Plan
Mr
Fred Bloggs, would like to consider the financial
implications of marrying his childhood sweetheart, Gemma, who is exactly one
year younger than him. In the fact find shown below he has a £150,000 home in his
name, and they’ve both agreed to retire at the state pension age of 68.
Fred
is currently a junior in his firm but expects to be promoted in ten years.
Gemma also has a good job, but anticipates having to take 4 years out of work
to start the family, after which she may not be able to catch up with Fred’s
earning power.
In
Fred’s case, the senior post currently pays £30,000. To find out what this will
be worth after ten years of inflation (as shown below in the pink section)
enter the From Year as 2011, the Final Year as 2021, then click the “=” button
after the End Sum, which results in £44,407. So his Senior
job is entered as a round £45,000 p.a. and the pink section is then cleared.
Note that Gemma stops work in 2018 on £26,319 and restarts a new job 5 years
later on £30,000.
As
shown below, some of their expenditure, like for food and clothing, will be
reduced if either dies, while other aspects will not. For example the car
really belongs to Gemma, but if she dies Fred will have to keep running it to
get to work. Likewise he’ll still have to pay more or less the same amount for
water, gas and oil.
Because
they both have good jobs they also hope to fund private education for the
planned two children, for which they’ll be jointly responsible, as shown below.
On
the other hand the house and mortgage are in Fred’s name, though it won’t be
possible to sell it on his death as Gemma and the children will still need
somewhere to live.
Gemma
and Fred think they’ll need around £8,000 p.a. each for a pension, which is
considerably more than the current state allowance. Fred has a private pension
with Aviva that he hopes will meet the shortfall, while Gemma is just relying
on Fred to help her out.
Finally,
Fred has taken out a £120,000 level term assurance policy to cover the mortgage
in the event he dies during its term.
FRED
In
the First Life Cashflow for Fred, above, you can see how he struggles with the
mortgage payments until his promotion in 2021. The school fees also make life
difficult, though overall he is able to cover his expenditure and save for his
retirement in 2058, where his state and private pensions combined would be
insufficient without these savings.
In
contrast Gemma, shown below, is not responsible for the mortgage payments,
though she is out of work for four years and then has to share the cost of the
children’s education. Hence her lifetime’s savings are less than Fred’s, and
her retirement situation where she depends solely on the state pension, looks
bleak.
GEMMA
The
overall Joint Lifetime Cashflow shows them very much on the breadline for the
first 8 years, with things getting pretty desperate while Gemma is out of work,
but thereafter they manage to save until their retirement, where Fred’s private
pension clearly is not enough to meet their expectations (which might arguably
be too high – do they really need a COMBINED pension of £16,000 p.a. at today’s
prices?)
OVERALL JOINT
CASHFLOW
Fred’s
Lifetime Net Worth, below, is very similar to how it was when projected for a
single person because he is the owner of the house, which is accruing in value
faster than the rate of inflation. His job also more than covers his expenses,
so he’s able to save throughout his lifetime. Even though his combined state
and private pensions are inadequate to meet his expenses at that time, and he
has to dip into his savings, overall his net worth continues to increase.
FRED
Gemma
in her own right, as shown below, has no major asset
that’s growing in value. She also takes four years out of work and then shares
the cost of the children’s education. Before she can recover from that she
retires without a private pension.
GEMMA
However
the joint position, which also reflects the legal one, is far from gloomy.
Overall their joint earning power and investment in the house will be more than
adequate, and most probably after 2035 (when they’ll be about 45+ years old)
they’ll be able to increase the mortgage and move to a bigger house (n.b. which is not included in this plan, though the
possibility of this action can be deduced from the OVERALL JOINT CASHFLOW,
above).
OVERALL JOINT
NET WORTH
In
the fact find the house and mortgage were entered in Fred’s sole name, so he’s
shown as having a potential inheritance tax liability, below. In reality if he
dies first this asset and the tax liability for it would both be passed to his
wife, whose own inheritance tax allowance would then negate it, as is shown by the
joint and second life Inheritance Tax Liability graphs being blank.
FRED (n.b. GEMMA and JOINT are both blank)
FRED
With
regard to Life Cover, you can see how Fred’s Level Term Assurance policy for
£120,000 causes a small reduction in the requirement for 25 years. However the
overall situation for both parties is that at each point in their life, if they
were to die they’d need the amount of cover shown in order to meet all of their
commitments.
GEMMA
This
is clearly illustrated in the joint life cover shortfall graph, below, which
shows their estate (i.e. the children) needing an additional policy for
£500,000 increasing to around £1,000,000 by retirement in order to ensure they
can pay the mortgage and the school fees and keep the house in the event of
them both dying.
OVERALL JOINT LIFE COVER
Using
the Custom Graph Button you can see how Fred’s private pension fund grows until
the annuity income (increasing with RPI) starts to drain its value.
FRED’S PRIVATE PENSION
Gemma’s
Pension Shortfall, shown below, is predictably the difference between the state
allowance and her requirement of £8,000 p.a. at today’s prices.
GEMMA PENSION SHORFALL
However
their overall shortfall is relatively small, as shown below.
OVERALL JOINT PENSION SHORTFALL