We explain how a conversation about retirement led to Carole realising that her whole financial future was at risk.
When Carole came to MKC for advice, she had a modest amount invested in a pension. She had previously worked with a financial adviser, who had since retired, and was unsure what she needed to do to keep her retirement plans on track. We contacted her and arranged to have an informal chat about this and her finances in general.
Building a pension pot to fund a comfortable retirement in 25 years’ time
Carole, a marketing consultant in her late 30s, has a good income. She is single and has an independent attitude to life – she has just finished renovating a lovely old cottage she bought last year with a £300,000 mortgage. The cottage was recently valued at £470,000. She had been paying into her pension each month, although she hadn’t increased the amount she was paying in, even though her earnings are now far higher than they were when she took out the plan. She currently has around £100,000 invested in it and she would like to retire when she is 57, but hadn’t worked out how much she would need to have saved by then to fund her retirement.
Successful and self-reliant
Having asked her about her finances, we asked her a few questions about her lifestyle and what was important to her. We also asked her what would change in terms of her income if she were unable to work for whatever reason. She told us that she wanted to be self-sufficient and didn’t want to have to rely financially on anyone, least of all her parents who had given her such a great start to life. She was used to being successful and assumed that life would continue to be kind to her.
Although she had life insurance that would pay off her mortgage were she to die, we were surprised when she told us that she didn’t have any income protection or critical illness cover. Given that her income would stop if she were unable to work, for instance due to an accident or serious illness, we asked her where her income would come from if something happened. She told us that she had a cash cushion of six months’ outgoings. We asked her how her clients would cope if she couldn’t work? Carole was dismissive of the idea that something might happen to her and said she was reluctant to pay for insurance that she felt she didn’t need.
We moved on to the issue of funding her pension. We suggested doing some cash-flow calculations to work out how much she should accumulate to fund her retirement. We also suggested that she pay employer contributions via her company, to reduce her corporation tax bill, and use the carry forward rules to pay in as much as possible in the current tax year. We agreed to talk again the following week.
Making pension contributions more tax-efficient
At the next meeting we went through the results of our cashflow calculations and Carole agreed to pay employer and personal lump sum payments into her pension. We had reviewed the funds she was holding and recommended ones more closely aligned to her attitude to risk and long-term investment objectives. We recommended she should revert to paying her contributions monthly as of next year to take advantage of what is known as pound-cost averaging – by making regular contributions rather than one-off lump sums, you remove the risk of buying into the market when prices are high. The idea is that you end up paying the average price. She agreed to these changes and told us that she felt a lot more confident about where her income would come from when she retired.
“I wouldn’t have been able to manage financially if something serious went wrong.”
We had also included a couple of income protection options in our report, as we felt that if she fell seriously ill her income would be severely compromised. We weren’t expecting her to take this up, and were surprised when Carole raised the subject spontaneously.
She told us that a close friend had been diagnosed with breast cancer since we had last spoken. She said that this had made her realise the extent to which she was exposed financially if something similar were to happen to her. Her friend, an accountant, is married with two children. Her employer has generous sick pay and she is covered by their critical illness cover and private medical insurance. Carole realised that she would receive none of these – moreover, if she were to be off work for several months, she would, she said, probably have to build up her business all over again. She thanked us for including the quote in our report despite her initial reluctance and, having talked through the options in detail, she decided to go ahead with the one that offered the most comprehensive cover.
These are now in place. Carole has also written, under our guidance and with the help of a professional, a Lasting Power of Attorney and a Will, to ensure that, whatever happens, her wishes will be respected. “I am,” she told me, “so glad that you called me. Talking to you and the questions you asked me helped me see my situation more clearly. There was I wanting to remain independent, yet I wouldn’t have been able to manage if I was off work due to sickness for more than a few months. To be honest, once I saw how reasonable the cost of protecting my income is, it was a complete no-brainer. Thank you.”
Please note that although this story is based on a real client, we have changed their name and aspects of their personal information to protect their privacy and identity.
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