Luke and Daisy’s Financial Plan

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Likely changes in the couple’s financial position

I have set up several financial milestones which will lead to relatively obvious fluctuations on their financial position based on the information and assumption.

2019 Luke: 57; Daisy: 50

This year the couple will travel to Australia, causing increasing expenditure. It is necessary for them to purchase the insurance policy to cover the cost of cancellation, luggage lost and medical costs. What can be assumed either in this year that Luke mother’s physical condition is becoming worse. Hence, the couple will take the whole responsibility of taking care of her, paying residential care costs (North East) around £29250 per year (Payingforcare, 2015). It is possible that they will use the emergency fund to cover it.

2020 Luke: 58; Daisy: 51

The car loan will be paid off in 2020, which indicates that their expenditure is definitely reduced by £2280 annually.

2022 Luke: 60; Daisy: 53

In this year, Luke will achieve his assumed retirement age and start to receive his pension. In addition, Daisy will start her part time role this year, leading to the half reduction of her income. As a whole, the total income tends to descend from this year along with reduced expenditure as the mortgage will be paid off this year. They may use saved money to spend on holidays or other areas.

2026 Luke: 61; Daisy: 57

Luke will inherit his parents’ estate without paying inheritance tax. Half of the amount is assumed to be putted in his portfolio to enhance more investment income.

2027 Luke: 65; Daisy: 58

A large amount of expenditure is spent on Alice’s university fee and property from Daisy’s investment portfolio. Additionally, capital gain tax will be deducted as well.

2029 Luke: 67; Daisy: 60

Luke will achieve the age when receiving the full state pension, adding income to cover the life expenditure.

2013 Luke: 69; Daisy: 62

Daisy will inherit her parents’ assets, some of which can be invested to her investment portfolio to increase retirement income.

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2036 Luke: 74; Daisy: 67

Daisy will retire this year with the loss of regular employment income whereas starting acquiring the state pension and teacher’s pension. In a nutshell, the income indicates a decline as the pension is lower than Daisy’s employment income.

The couple’s financial position at retirement:

I estimated that the average investment income for Luke and Daisy is 2500 and 4639 per annum according to their net annual return which will be calculated in part D.

According to my research, a UK pensioner annual expenditure after retirement on average is 11,200, (Cheong, 2015). I suppose that the couple’s expenditure after retirement will be 45,000 per annum considering the inflation and their personal situation.

Table 2: Likely Financial Position at Retirement

Luke

Daisy

Total

Income

Pension income

26,750

34,844

61,594

Investment income

2,500

4,639

7,139

Total gross income

29,250

39,483

68,733

Income tax

2,031

5,697

7,728

Annual expenditure

45,000

Net income surplus

16,005

The table indicates that their income can cover their expenditure and leave much surplus per annum, which could be kept investing for the travelling or plan to increase assets for estate planning.

Assumed scenario 1: Luke retires at 55

Luke is able to retire this age as NHS pension scheme rules allow the minimum retirement is 55, (NHS, 2016) However, NHS (2016) presents that early retirement creates 21% and 15% reduction on the whole pension value and lump sum respectively, resulting in potential gap between income and expenditure. In addition, the majority of the mortgage repayment and car loan will be shifted into Daisy. If Daisy cannot work due to the illness, the couple will be trapped into financial burden.

My recommendation is that Luke had better not retire before paying off the mortgage.

Assumed scenario 2: Daisy retires at 65

Similarly, it is feasible for Daisy to retire before 67 whereas her annual benefits will be declined to support long term payment, (Teachers' Pensions, 2015). Daisy can choose to retire early while considering spending on life expenditure and travelling.

Part B

Luke: He has contributed to a defined-benefit pension scheme related to final salary, in which he could receive £13978 plus £4678 (in total £18656) per annum after retirement.

If he chooses to take a lump sum to repay mortgage, a reduced pension for the following years is given to him. However, considering a growing trend of the interest rate in the future, (Financial Times,2016), it is essential for them to repay earlier to mitigate the potential increase in interest paid, (The Money Advice Service, 2014).

Daisy: Daisy owns both Teachers’ pension scheme and defined contribution pension. After rough calculation in “Teacher’s Pension Scheme” site (2016),

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