Pensions doctor
Amelia Murray helps a freelance singer and music teacher plan for an annual retirement income of up to £30,000
Alison Place has been a freelance professional singer since 1980. At 64, she works up to 60 hours a week as an extra chorister with the Royal Opera House and gives singing lessons. She does not want to stop working yet, but recognises she may need to “wind it down” at some point. Ms Place says her aim is not to “run out money before she runs out of life”.
Ms Place converted a private pension worth £90,000 into an annuity two years ago as she felt rates would get worse. Her annuity pays £5,000 a year before tax. She was entitled to a state pension in May 2014 at 62 but deferred it and plans to defer it again. When she takes it, it will be £800 a month.
Ms Place is singing in Verdi’s Il trovatore at the Royal Opera House. She has had at least three contracts every season, paying £3,000 each. She also gives singing lessons at a private school and from her home, which she estimates brings in another £12,000. Her income is unpredictable but she estimates she will earn £37,000 this year. She saves £200 a month into a stocks- and-shares Isa and £400 a month into a Club Lloyds monthly saver that pays 3pc.
She has £50,000 in her Isa and other stock market vehicles and the same amount in cash – £20,000 of this is invested in a Castle Trust bond that pays 3.9pc.
Ms Place has no debts and owns her home in Hampton, south-west London. She estimates the two-bed Sixties Wimpey house is worth £350,000. Her family “has enjoyed an active long life on both sides” and she intends to keep working for as long as she can. She has another year of work guaranteed with the ROH.
Ms Place thinks she can retire comfortably on an income of £25,000 to £30,000, which would allow her to run her car, travel and provide a “cushion” if the “roof falls in”.
Danny Cox, head of financial planning at Hargreaves Lansdowne, said:
Ms Place’s primary objective sums up the need for financial security as she heads into retirement. She holds £50,000 in a stocks-and-shares Isa and other share vehicles which, if converted to income-paying, could generate about £2,000 a year. Planning to deliver Ms Place’s income target needs to take into account tax paid. Income tax is payable at 20pc on the annuity and state pension income once it exceeds the personal allowance of £11,000. This would cut income by £720.
Income from an Isa is tax-free, meaning the potential for £16,640 a year, ignoring her savings. This leaves a shortfall of £8,360 to £13,360 a year.
Ms Place’s annuity is likely to be a fixed and level income, meaning its spending power will devalue over time. The state pension is inflation-proof, and you would expect the income from stocks-and-shares Isas to rise over time.
For the foreseeable future, Ms Place will work to keep her income above her outgoings. Building her savings and investments in the meantime is a good plan. She should focus on her investments, which are likely to outperform cash. If she has to give up work, an option would be to use her home’s value to support her lifestyle by downsizing or equity release. Downsizing is expensive. It involves the sale of her home, then purchase, with fees, legal costs and tax in the form of stamp duty.
With equity release, Ms Place would borrow against her home’s value. This is also expensive as interest is added to the loan annually. But what is owed is repaid on death from the sale proceeds at the expense of her beneficiaries.
A drawdown-type equity release scheme would allow Ms Place to supplement her income with regular capital withdrawals of, say, £1,000 a month. The capital is not taxed and would avoid the need to move house. Her Castle Trust bond is a fixed-interest, fixed-term investment in which the interest is paid gross.
From 6 April all bank and building societies now pay interest without deducting tax. Basic-rate taxpayers do not pay tax on the first £1,000 of interest and higher-rate taxpayers do not pay tax on the first £500.
If Ms Place remains a basic-rate taxpayer, the first £1,000 of interest will be tax-free. The rest is subject to income tax at 20pc. She should use a cash Isa to shelter £15,240 of savings from tax this tax year and £20,000 – the new Isa limit from April 2017 – next year.
When the Castle Trust bond matures, the interest rate is likely to drop and Ms Place needs to decide if the inflexibility and risk of this product are worth the interest rate offered. I don’t think they are. Holding £50,000 in savings and bonds feels like a good amount to keep relatively liquid and at least £15,000 of this should be easily accessible (broadly six months’ expenditure).
Anna Sofat, founder and managing director of Addidi Wealth, said:
On the face of it, Ms Place has a good lifestyle, with no debt and enough income to live as she chooses. But she might not have enough savings if she stops work. If possible, she should work to 70. It’s unlikely she could continue to earn at current levels until this age but she can afford to scale back by taking her state pension between 65 and 76.
She would then have a net income of £1,200 per month and a shortfall of £700 to £1,000. She could generate this income from earnings of £10,000 to £15,000 per year – about 35pc to 50pc of what she is earning now.
At present she has £100,000 in savings and is adding a further £5,000 to the pot each year. So by the time she is 70, her savings should be at least £137,000, even if she takes no risk and earns just above inflation.
If she then earns £10,000 per annum then her savings should last until she is about 83. At that point she will need to access some equity from her home. At current values she should be able to release up to £140,000 (40pc of the value) which could provide income for another 15 years.
Assuming her needs remain relatively stable, Ms Place should have sufficient assets. Her main risk is if she stops work too early or if her need for income increases.
Ms Place can pay to top up her state pension by £25 per week at a cost of around £22,830. This equates to an annuity rate of 5.6pc for an indexed-linked pension of about £86 per month net of tax. This is a good rate, but of course she would need to give up all that capital. Assuming the triple-lock guarantee for the state pension rises continue and we see annual rises of at least 2.5pc a year, the breakeven point for Ms Place is about 14 years. After this she would be better off having bought the state pension.
Ms Place is deferring her state pension and so is getting an increase of 10.4pc per annum, which is very good. She should defer the pension as long as she can. If Ms Place was pressed for income or had to stop work next year, then she should also consider renting out her spare bedroom. Under the “rent-a-room” scheme she can earn rent up to £7,500 per annum without paying tax. Or she could rent her home for holidays via Airbnb and use the funds to travel.
‘I want to avoid running out of money before I run out of life’