Independent Financial Advice
Case Study 1.
We can't use actual names but here is a very typical case study for “Jane Doe”, where we will be looking at how an Independent Financial Adviser (IFA)
This is just an example of how an IFA can help and is in no way exhaustive.
Jane has recently turned 50, in light of reaching this mile-stone, she thought it would be an ideal time to take stock of her finances as she has decided to retire at the age of 60. To Jane's surprise she has managed to build up funds of circa £300,000 held in cash accounts. She has been in full time work since the age of 16 but has never sought the advice of an IFA before now. Jane has been married for the past 20 years, but other than a joint current account for bills, they keep all of their finances separate. Jane and her husband have two non-dependent children, and since they both flew the nest as soon as they could, Jane has not had to worry, or check on her balances for some time.
Jane's Advice Journey
Upon realising that she had accumulated such a substantial amount of funds in her cash accounts, Jane arranged for a meeting with a local IFA to review her finances and to ensure that when she reaches retirement she has sufficient money available to continue with her current lifestyle and allow Jane and her husband to travel more.
Initial Meeting – Jane's Financial Position
The first thing Jane and her adviser did was to establish an accurate view of her current assets and liabilities. The joint account, and her husband's assets and income were not considered at this time. It was established that Jane's annual income, before tax amounted to £85,000 per annum.
Jane told her adviser that she and her husband split the cost of the mortgage proportionally between them. The total cost of their monthly mortgage is £1,600; but as Jane earns more she pays the lion's share. Since moving into their current home, 6 years ago, the value of their property has risen by £50,000. The cost of utility bills they split directly down the middle; the figures shown below for utilities and council tax are the full monthly amounts, as such Jane's expenditure is half. Jane told her adviser that she is paying into her employer's group personal pension (GPP) and has been for the past 15 years, she currently pays £500 per month, with her employer also matching up to 5% of her salary. Before their meeting, Jane's adviser requested that she bring in some policy information for her employer's GPP, alongside details of any other pensions from previous employment so that they can establish the value of her pension pots.
It was established that Jane's monthly expenditure equates to £2,460.50, this equates to around 51.5% of her net monthly income of £4,776.32 after tax and national insurance. She does not foresee any changes to either her income or expenditure in the near future.
Jane has managed to build up surplus cash of circa £200,000, £60,000 in her bank accounts and building society, with a further £40,000 held in a cash ISA.
Having established Jane's income and outgoings, it was worked out that she has surplus income of around £2,315 per month. The initial advice for Jane is as follows:
Making the most of Jane's personal allowances
- Increase her monthly pension contribution to utilise her annual allowance. For the 2018/19 tax year, this equates to £40,000. The annual allowance is the threshold for personal pension contributions that are eligible for government tax relief. At Jane's current contribution level of £500 per month, she would pay £6,000 in total into her pension. It was agreed that she would increase her pension contribution by a further £1,300 per month, as Jane liked the security of knowing there was a further £1,000 each month available to cover any unexpected expenses.
- Increasing Jane's monthly pension contribution to £1,800 per month means that in the 2018/19 tax year she will have contributed a total of £13,800, split as 6 months payments of £500 and 6 months payments of £1,800. It was agreed that Jane would make a further single pension contribution of £18,200 so as to fully utilise her annual allowance.
- Jane is entitled to government tax relief of 20% at source for her personal pension contribution, so a further £8,000 will be contributed at the request of her provider, taking her total contribution up to the allowance of £40,000.
- As Jane is a higher rate tax-payer, at 40%, she is eligible to claim the remaining 20% tax relief on her pension contribution in the form of a self-assessment tax return. Overall, Jane will have gained an extra £16,000 in her pension pot, just by utilising her personal allowance on the advice of her adviser.
- Jane was unaware of the level of her pension contributions for the previous 3 years, it was agreed that once her adviser had gained authority on her pension plans they would work out what her previous contributions were to see if she could make a further contribution as you are entitled to carry forward your allowance from the three prior tax years.
- Open a stocks and shares Individual Savings Account (ISA) and utilise your full ISA allowance for the year; for the 2018/19 tax year this is currently £20,000. (Jane had not made any contributions yet this tax year).
- Transfer in the pre-existing cash ISA.
- Open a General Investment Account (GIA) with the same provider as your ISA, to be used to utilise your future ISA and pension allowances. The exact deposit amount will be determined once Jane's carry-forward calculation has been completed.
- Complete an attitude to risk questionnaire, this allows Jane's adviser to determine suitable funds for Jane to invest in; investing in funds provides security against the rate of inflation and has far greater potential to increase in value than leaving her money as cash.
Next steps and charges
Jane and her financial adviser agreed on an initial fee of £2,500 + VAT (£3,000) for the advice and policy implementation; for the ongoing service, it was agreed that her adviser would receive a fee 1.00% of the funds under service per annum, paid on a monthly basis directly from the platform recommended.
It was agreed that Jane and her adviser would meet again in 3 weeks' time, this would allow the adviser time to research a suitable provider, prepare the paperwork to implement the recommendations, determine a suitable portfolio of funds for Jane to be invested in. This also allows Jane time to collate her pension documentation so as to determine where her other pensions are currently held, their values, and her recent contribution history.
Jane felt that the total charge for the initial advice of £3,000, inclusive of VAT, was agreeable as by heeding the advice of her adviser and utilising her allowances, she was already in a position to make a gain of £16,000 for her pension pot. This is even before the potential gains to be made by investing in the markets rather than holding her funds as cash. The knowledge and advice gained from her initial meeting reaffirmed for Jane that seeking financial advice was the correct step, and that going forward her future retirement and her funds were in capable hands.
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