Tom’s retirement case study
Tom is a 65-year old divorced father of two. See how he managed the assets he’d accumulated over his working life and find out how it served him throughout retirement.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. The past performance of investments is not a reliable indicator of their future performance.
Profile
Tom is a 65-year old divorced father of two. He has worked as an architect for almost four decades and is currently a senior partner in an architectural business where he works part-time.
I am fortunate to be able to do a job I love which also allows me to indulge my two passions in life – golf, and spending time with my four grandchildren.
During his working life, Tom has managed to build a number of investment portfolios.
I like to invest in things I know and understand. Given my extensive experience from working in the building sector, I have invested significantly in this industry over the years. I intend to use these funds to help support my son and daughter who are currently contemplating whether to move house or extend their existing homes to cope with their expanding families.
Financial assets
Tom’s ex-wife, Elizabeth, gave up work as a solicitor when she was pregnant with their first child, Henry. Following the birth of their daughter, Chloe, two years later she decided to become a full-time mother.
A few years after the children went to university, Tom and Elizabeth agreed to an amicable separation. The subsequent divorce provided for a one-off lump sum payment to Elizabeth.
Despite paying a not insubstantial settlement to my ex-wife on our separation, I have been able to set aside approximately £450,000 in assets.
Figure 1: Asset breakdown (on day 1)
What are Tom’s goals for retirement?
I have life membership at my local golf course and try to play two or three times a week. I also enjoy my summer holidays and tend to go to the Med twice a year where I can play at a number of different golf courses with the friends I have made on previous trips.
Tom still enjoys his work and is happy to continue working for as long as he remains fit and healthy.
I plan to keep on working 3 days a week until I reach 75. I then intend to sell my partnership share and give cash gifts to each of my grandchildren as they reach the age of 21.
What was the outcome for Tom?
From continuing to work part-time, there is no need for Tom to draw down from his retirement pot.
As planned, I sold my partnership share when I reached 75 and received a significant lump sum. Despite the cash gifts I have made to my grandchildren, I still have a large capital surplus available which should be more than enough to meet my needs and provide me with a comfortable retirement.
According to the Official for National Statistics (ONS), the average life expectancy for a male aged 65 today, is 85 years. At this age, Tom’s remaining retirement pot would be worth £584,000. Should he live to 100, Tom would still have a pot worth £200,000 (Figure 2b).
Looking at the figures, I realise that the beneficiaries of my estate may incur an inheritance tax liability on my death. I think I should consider taking some professional advice on estate planning to try to minimise this liability as much as possible.
Figure 2a: The annual surplus/shortfall over time based on Tom's annual income and expenditure
Figure 2b: The remaining value of Tom’s retirement savings over time
This scenario is based on an assumed rate of return of 2.5% per annum. The actual rate of return could be higher or lower, which would result in different outcomes.
The annual income is made up of employment income, dividend income, pension, and state pension. The state pension amount is the current maximum and is only an example. The amount you get depends on your National Insurance contributions’ record and your individual circumstances. You can get a State Pension forecast by visiting GOV.UK View - Check your State Pension.
The annual expenditure is made up of essential, supplementary, and luxury expenditure.
For a breakdown of the annual income, annual expenditure, and the annual income surplus/shortfall, refer to the Appendix.
Did Tom have any other options to consider for his retirement?
Tom has a number of options which he could consider; reduce his income, increase his spending, or reduce his capital.
Although I only work mornings, I could stop working all together. This would allow me to take up new hobbies, and the option to take a few more holidays.
Perhaps the most appropriate option would be to reduce my capital. If I sell my investments in the building sector, this will not only reduce the risk of having all my eggs in one basket but also allow me to withdraw some of the capital. I could use this money to set aside larger cash gifts for my children and grandchildren now. I am sure there are lots of things I could do, and I would definitely like to give more to my grandchildren, so I would seek advice on the best way.
Tom should consider what pot of money he accesses first to supplement his income shortfall. Most but not all investment growth of the assets held within registered pension schemes is exempt from income and capital gains tax and are also free of inheritance tax (IHT). Therefore, these assets can be passed on following his death without an IHT liability. He should consider accessing assets that would be subject to IHT first to reduce the liability on his estate.
Calculation assumptions
The following table shows the assumptions we have used in our calculations.
Figure 4: Growth rate assumptions
| Growth Rate Assumptions (%pa) | Nominal | Real (Implied) |
|---|---|---|
| Inflation | 2.5% | – |
| Income growth | 2.5% | 0.0% |
| Expenses growth | 2.5% | 0.0% |
| Asset growth1 | 2.5% | 0.0% |
Important considerations
This example is based on current law and tax rates. These may change in the future and income tax will depend on individual circumstances.
Money paid into a pension cannot be withdrawn until you're aged at least 55 (this is rising to 57 on 6 April 2028). Bear in mind this may increase further in the future.
This scenario is based on an assumed rate of return of 2.5% per annum. The actual rate of return could be higher or lower, which would result in different outcomes.
All investments can fall as well as rise in value and you can lose some or all of your money.
This communication does not constitute an investment recommendation or tax advice.
We don't offer personal financial or tax advice, so if you're not sure about investing, seek independent advice.
If you live in Scotland or Wales you may have a different income tax rate or band.
Appendix
| Term (Yrs) | Period | Client age | Description | Employment | Dividend | Pension | State | Total (Gross) | Total (Net) | Tax rate2 |
|---|---|---|---|---|---|---|---|---|---|---|
| 10 | Years 1–10 | 66–75 | Works 3 Days pw | £45,000 pa | £5,000 pa | £ Nil | £9,000 pa | £54,000 pa | £45,000 pa | 16.7% |
| 1 | Year 11 | 76 | Sells out partnership | £450,000 pa | £5,000 pa | £ Nil | £9,000 pa | £459,000 pa | £459,000 pa | 0% |
| 24 | Years 12-35 | 17-100 | Retired | £ Nil | £5,000 pa | £ Nil | £9,000 pa | £9,000 pa | £9,000 pa | 0% |
| Term (Yrs) | Period | Client age | Description | Essential | Supplementary | Luxury | Total |
|---|---|---|---|---|---|---|---|
| 10 | Years 1–10 | 66–75 | Working | £15,000 pa | £15,000 pa | £10,000 pa | £40,000 pa |
| 1 | Year 11 | 76 | Wealth Distribution | £15,000 pa | £15,000 pa | £215,000 pa | £245,000 pa |
| 13 | Years 12-24 | 77–89 | Retired (Active) | £15,000 pa | £10,000 pa | £10,000 pa | £35,000 pa |
| 11 | Years 25–35 | 90–100 | Retired | £15,000 pa | £10,000 pa | £ Nil | £25,000 pa |
| Term (Yrs) | Period | Client age | Description | Income (Net) | Expenditure | Annual surplus / shortfall | Discrete (Term) | Cumulative |
|---|---|---|---|---|---|---|---|---|
| 10 | Years 1–10 | 66–75 | Works 3 Days pw/Working | £45,000 pa | £40,000 pa | +£5,000 pa (for 10 years) | +£50,000 | +£50,000 |
| 1 | Year 11 | 76 | Sells out P'Ship/Wealth Dist'n | £459,000 pa | £245,000 pa | +£214,000 pa (for 1 year) | +£214,000 | +£264,000 |
| 5 | Years 12–16 | 77–81 | Retired/Retired (Active)3 | £9,000 pa | £35,000 pa | -£26,000 pa (for 5 years) | -£130,000 | +£134,000 |
| 8 | Years 17–24 | 82–89 | Retired (Active) | £9,000 pa | £35,000 pa | -£26,000 pa (for 8 years) | -£208,000 | -£74,000 |
| 11 | Years 25–35 | 90–100 | Retired | £9,000 | £25,000 pa | -£16,000 pa (for 11 years) | -£176,000 | -£250,000 |
Source: Barclays