The Daily Telegraph - Saturday - Money
Money Makeover ‘How do we replace our £9k-a-month income?’
A couple are living off health insurance payouts but need a plan for when they stop, they tell Lauren Almeida
The diagnosis of a long-term illness can throw even the most carefully planned of retirement strategies off- course. Nicola Philips, 62, from Gerrards Cross, Buckinghamshire, is trying to plan around her husband’s Parkinson’s disease so that they don’t have to compromise on the comfortable retirement that they have worked so hard for.
Tom Philips, who is 61, earns £ 9,500 a month from a health insurance scheme, which is their main source of income. However, this is due to end in four years – and the couple are worried about the shortfall.
“We don’t have an extravagant lifestyle,” Mrs Philips said. “And we can’t travel because of my husband’s condition. But we want to live comfortably, enjoy ourselves and go out to restaurants sometimes.”
Mr and Mrs Philips own their home, as well as a buy-to-let in London, but have significant mortgages on both.
“I’m worried that we won’t be able to keep up with mortgage payments on the properties when the salary from the health insurance scheme ends,” Mrs Philips added. “We have tried selling our buy-to-let, but have really struggled.”
The couple bought their main home last year for £ 930,000, with three mortgages, totalling £ 1,500 a month in repayments.
Their rental is a flat in n the Barbican, London, bought ught for £ 800,000. After mortgage gage payments and agent fees they earn £2,300 a month from it. They have £90,000 in cash savings, gs, and Mrs Philips has a Sipp that hat is worth £ 20,000. Mr Philips has a pension n with Aviva that is worth h £400,000, as well as s two defined benefit pensions pay i n g £ 1,000 and £ 300 a month respectively.
“We just want to figure out how to get our finances in order so that we can continue our current lifestyle. Should we keep trying to sell our flat or is there something else e that we can do to pre- pare?,” Mrs Philips said. .
Chartered financial planner at Timothy James & Partners
When the salary from the health insurance scheme ends, the income reduces to around £ 3,556 per month with mortgage costs of £ 2,263 leaving £1,293 which is unlikely to meet their needs, especially as they like to live comfortably and dine out.
They have £90,000 in cash, but that is about to be reduced to £45,000 on home renovations. It may be sensible to retain the balance, £45,000, on deposit for any short-term needs. Mrs Philips could make use of her Isa allowance of £ 20,000 with some of this capital.
Turning to Mr Philips’s pensions, let’s use a withdrawal rate of 4pc from investments to figure out what his income would be based on long-term returns. This would be around £16,000 a year ( before tax).
Mrs Philips may be able to apply pension rules to draw sums from her pension over one or two years. Compared with the property and savings, pensions are very effectively shielded from inheritance tax, which may also be a consideration in their long term plans as they have two adult children.
Their two properties are both mortgaged and given the recent changes to interest rates the payments may have increased recently. One tranche of the mortgage o on their residential home is on a variab variable rate as is the buy- to-let mortgage.
I would revisit re the option of selling it sooner, to coincide c with the end of the mortgage product. pr At the very least the mortgage mortgag should be reviewed promptly; promptl if no action is taken then the loan loa will revert to the “standard variable va rate”, currently over
4pc with w some lenders.
V
Victoria Jones Chartered financial planner at Quilter
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I’d recommend the couple make a will and set up a Lasting Power of Attorney. Without an LPA Mrs Philips will not have any control c over her husband’s pensions if he is deemed no longer to have the mental capacity to deal with his finances fi himself. At the moment, m without a will they could miss out the transferable “nil- rate band” that is available to spouses on death to offset against inheritance tax.
They should check if they need to make voluntary National Insurance contributions between now and their state pension ages to fill in any possible gaps. They should also make sure that Mr Philips is receiving personal independence payments, Pips, and that if Mrs Philips is his full time carer she is claiming carer’s allowance.
To put them in a more stable financial position once the health insurance payments run out, it would be sensible to release capital from their buy-to-let property. While they have had some difficulty selling, I would keep trying. The property market may be at its peak so it would be wise to persist with the sale before prices fall. The proceeds of the sale should be pooled with the cash savings (minus their capital needs for refurbishment costs) in the savings account and tax- free cash from Mr Philips’s pension. This together should be used to initially pay down their mortgage on their primary property.
Mrs Philips should move her small pension pot to a very low cost provider and invest it, not leave it in cash. Once the rental property has been sold and before the commencement of her state pension, I would withdraw this pension over two years to meet their income needs.
Mr Philips has two modest defined benefit schemes which will provide a regular inflation- proofed income at retirement. It’s worth checking if Mr Philips qualifies for an ill-health lump sum, which could be more beneficial in terms of meeting his income needs. Another potential route would be to consider a transfer on his two DB schemes.
This could result in a combined pension of more than £700,000, not only giving access to flexible income and valuable death benefits, but also the option to unlock around £ 175,000 in tax free cash, which could be drawn as a lump sum. You will need to take financial advice if moving a pension worth £30,000 or more.