Case Study
"I am in my early 60s and am in the process of getting divorced. Though,
as a couple, we have enjoyed a very comfortable standard of living, as
divorcees I fear we will both discover ourselves to be in very different
circumstances. I have run my own business for many years but the
recession has seen orders all but dry up over the past 12 months. I
believe business will start to pick up again soon but I have little
additional income. I do not have a pension and have been led to believe
that following the economic downturn my husband’s pension will, once
split as part of our divorce settlement, amount to around just £17,000
per annum each. Ignoring for the moment the immediate issues of trying
to sell our home in the weak UK housing market, please can you advise me
as to how to go about ensuring I will have enough income to see me
through my retirement years? I believe that post-divorce I will be able
to afford a small but comfortable property but beyond this I am finding
the prospect of achieving suitable income and dealing with my finances
rather overwhelming."
Independent Response
Philip J Bevan, BSc (Hons), Dip PFS, IMC; Director, Agora
Asset Management Limited
"Your starting point is to calculate the income and capital remaining post divorce after deducting the cost of your new home.
"You need to ensure that your home purchase will leave enough capital to create the income you will need. A simple and pragmatic estimate is to use 5% as a long term goal. i.e. each £100,000 of capital to generate £5,000 income. Although this does not consider taxation and inflation, it will quickly become apparent if you have a problem looming. You should also analyse your lifestyle and expenditure before calculating your income requirements.
"Building an efficient retirement income involves different income streams and maximising tax allowances. The help of a good adviser and modern financial products makes it easier than ever. However, as bank rates are very low it is likely that you will have to accept some risk in order to create a sustainable and inflation proof income over the long term.
"You should review your State Pension, to ensure the details on which it is based are correct. It is possible to pay contributions to make up for any gaps and this can provide a good return on capital over the long run. You may also be entitled to some additional state pension from your husband’s NI record post divorce.
"With respect to your husband’s other pension, seek professional independent advice before negotiations finish as Cash Equivalent Transfer Values detailed for the Financial Form E is an overly simplistic value for some schemes.
"Investment options are vast but include creating an ISA portfolio of
investment funds to create an income. You can only pay in £10,200 per
annum, so it will take time to build to a level where it provides a
meaningful income. Such an investment might include equity income,
property, and bond funds and you would choose funds to suit your risk
profile and the yield they generate.
"Also consider establishing a Unit Trust portfolio and moving units into the ISA portfolio each year. The Capital Gains Tax (CGT) allowance is £10,100 per annum and hence gains can be managed and passed into your ISA each year. Using our 5% return model means an investment of roughly £200,000 to use your annual CGT allowance.
"Any income generated from a Unit Trust portfolio is taxable, so depending on your tax rate you must reflect on how this would affect your investment choice. i.e. Would you be better investing for income or capital gain, or both? Investing for gain entails selecting growth funds which don’t distribute income. ISAs and the Unit Trusts could be with same provider allowing a seamless transfer and many fund platforms offer this with minimal fuss or cost.
"If you need a more regular income and are in the higher rate band whilst still working you might consider an Investment Bond to take 5% income tax deferred.
"Putting personal or company monies into your own pension is also an option and would be most tax efficient if you receive tax relief at more than 20% for contributions going in and pay only 20% when you take it out. The downside is a lack of flexibility."
Disclaimer: All views expressed in this article are those of the financial adviser and not necessarily those of Morningstar, Inc. Morningstar is not responsible for the financial adviser's comments nor will it be liable in any way for any advice or information provided by the financial adviser.
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