Pensions doctor
Amelia Murray helps a graphic designer find out if his plan to quit his job and start a business makes financial sense
Brian Clements has struggled financially in the past, especially during his years as a freelance graphic designer, when his work was uncertain and payments had to be chased. He wants to ensure that his future is stress-free and that he has enough money to enjoy himself without worrying.
Mr Clements, 59, wants to leave London and his £45,000-a-year graphic design job and move to Derbyshire to start a walking tour business. He says he could live on half of his current salary.
He plans to trial this new life for three months before selling his flat and moving for good. He intends to buy a new home in Derbyshire to run as a bed and breakfast alongside the tour business. Mr Clements’s main asset is his one-bedroom flat in south London, a Victorian Grade II-listed building in the “second most desirable street in Crystal Palace”. He bought it in 1981 for £51,000 and says it’s now worth £380,000.
He paid the mortgage off three months ago and is now considering a sale, as he feels property prices might have peaked and getting the cash now would be better than letting the property.
Mr Clements has three private pensions that he set up during his freelance years. His Scottish Widows pension was valued recently at £58,296 and his two Phoenix Life pensions are worth £63,202 combined.
Although he has been employed for 10 years, he never enrolled in his company’s pension scheme as he did not think it was worth it at the time. His other main asset is £18,000 in Premium Bonds. He pays in £200 a month and since 2007 has won between 20 and 30 £25 prizes. Mr Clements is holding out for the big win, although he knows there have been prize cuts recently.
Patrick Connolly, a certified financial planner at Chase de Vere, said:
It’s great that Mr Clements plans to do what will make him happy and he is being very sensible in planning for his change of career. But he needs to be aware that he is taking a risk. If he moves to Derbyshire permanently, he may need to rely on his existing assets to support him, as there will be uncertainty over the level of income he will earn, at least at the beginning. While interest rates are low on most savings accounts there is no great damage in holding Premium Bonds. However, it would be more practical to have his cash in an accessible savings account to cover him before settling down in Derbyshire.
His London property is worth three times more than all his pensions combined. If he plans to buy a property in Derbyshire, the proceeds of the London flat will allow him to do this and have no mortgage, assuming he buys for less than £380,000.
But I would have major reservations about buying a more expensive property in Derbyshire unless his plans have been well thought through and budgeted.
As a rule of thumb, even though Mr Clements can access his pension money, if he doesn’t need it he should leave it where it is and benefit from tax-efficient growth. As he is over 55 and can access his money whenever he wants, he should be focusing more on investing in pensions.
He has a guaranteed annuity rate with his Scottish Widows pension. He needs to find out if he will lose this rate if he doesn’t take it at 60. If he starts taking an income from his Scottish Widows pension, this could help to supplement any shortfall between his salary now and what he might earn, initially at least, in Derbyshire. He should review his Phoenix Life policies to ensure they are invested in suitable areas for him and offer good value. If they don’t, he can change his underlying investments or transfer to a better pension plan without taking his pension benefits.
For his existing and future pensions and investments, a broad split of 50pc in stock market funds, 35pc in bonds and 15pc in commercial property would be reasonable. Rather than looking at high-risk investment funds, I would suggest core stock market funds such as Threadneedle UK Equity Income, Rathbone Income and Fundsmith Equity. For bond funds I would recommend Kames Strategic Bond or Jupiter Strategic Bond, while Henderson UK Property and M&G Property Portfolio are two good property funds.
An alternative is multiasset funds to diversify risks further; examples include Schroder Multi Manager Diversity, Investec Cautious Managed and JP Morgan Multi Asset Income.
Philippa Gee, managing director of Philippa Gee Wealth Management, said:
I would prefer to be optimistic about Mr Clements’ finances. But I want him to have the best financial future possible so I feel a dose of realism is necessary. At this point Mr Clements’ plans are not financially possible, so strategic thinking is needed.
First, let’s consider his principal asset, his home. He should be looking to sell it rather than rent it out. A sale is the only way he can afford to relocate. Letting it would give him an income, but no capital on which to build a suitable business.
If we look at B&Bs for sale in Derbyshire, the cheapest freehold venue I found was £360,000. This would use almost all of the sale proceeds from his home, with the rest spent on stamp duty and legal fees, leaving him with just his pensions and his Premium Bonds.
If he is thinking of funding the three-month “taster” stay in Derbyshire from the Premium Bonds, and if the bonds really are his one remaining asset, I would strongly suggest that he tries to protect this money as much as possible.
Mr Clements should give himself time to set up the business before it produces the income he will need. This means he has only the £18,000 in Premium Bonds to fund normal spending and any investment the business may need. So he has an initial cost headache and a future cost headache, as his retirement income may not be enough.
He should get his state pension at 66 and, if he fulfils the qualifying criteria, he could receive the new “flat rate” of £155.65 a week in today’s money. Assuming his state pension is £8,000 per annum, the other pensions are small in value by comparison and will provide at best an income of between £3,600 and £6,000 a year, depending on the details involved and the level of the guarantee offered on one pension.
If the guarantee is significant, it could raise the total eventual income from the private pensions to between £7,690 and £8,950, roughly speaking. All these figures are gross. So it’s crucial to look at these pensions and to consider deferring those that are more flexible.
These pension figures still fall short of the £22,500 a year required, with a gap of at least £5,550 a year, or more if inflation starts to hit. So Mr Clements needs to consider carefully what business he could set up now to create that additional income in retirement. Continuing freelance work might help subsidise his move to Derbyshire and preserve his capital.
Mr Clements should also look at businesses that can be set up with little capital investment. This way, while a home would still need to be purchased, a large proportion of the money from the sale of his property could be used to provide both initial income and help towards funding retirement.
‘He should be focusing more on investing in pensions’