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Fergus and Felicity Financial Plan Report

1. Couples Objectives and Financial Plan

This is a breakdown of your financial plan, projecting likely changes you in your financial situation from 2021 (now) to your retirements at 60 years. In our budgeting for your financial plan, we have made the following assumptions for both of you;

2. Your rates of savings will be 2.5%
3. Inflation will be 2.5% and

• The effective rate 0.5%

1. Constant costs of living during retirement

Beginning 1930, the United States has experienced only 8 years of deflation, with four of them occurring in the period 1930-1933. The last deflation occurred in 1955. The inflation impact has been constant, implying that the very same goods that sold in 1930 at $1000 are now selling at over $15,000 in 2020. Your buying power is likely to drop with time given that your salaries will remain constant before you go to retirement at 60 (Lusardi & Mitchell, 2011). Given that the couples have fixed income, the combination of inflation and longevity, in the end, steals away your financial security, and this impact is likely to escalate with time.

We also understand that as you age, your living costs will most likely remain constant during your retirement period. Due to the inflation effect, and consequently, due to reducing buyer power, you will always be saving at a lower rate of 2.5%, and not the expected 4% or higher. The reduced savings ability will be a result of external factors.

Table: Fergus Budget

Table: Felicity Budget

1. 2014/15 Pension Reforms

The 2014/15 reforms were specifically meant for persons aged between 55 and 74 years, meaning that the Budget announcements directly impact both of your situations. The 2015 pension reforms offer you the freedom to save more (Skinner, 2007). The reforms allow those who have built lump-sum in a defined contribution to take the funds as cash, buy an annuity or draw them down over time. Initially, you only had the chance to either keeping the funds invested in drawdown if it’s bigger or exchanging these pension savings for an annuity that pays a lifetime income. We all know that the annuity has already plummeted and not a viable option. So, you are in a position to take 25% of your pension fund as a tax-free lump sum, the 75% will be taxed on your marginal tax rate (initially the tax rate was very high 55%). So the 2014/15 reforms did away with the regulatory bias which initially forced many people to buy annuities when the time was not right and for a very poor and low value. Therefore, if you have a total pension savings of 30,000 and below you are allowed to take the money as a cash lump sum (initially it was capped at a low 18,000) (Johnson, & Simkins, 2014). This change to a budget ensures that you have access to more of your cash which is a good thing. However, you must realize that without proper scrutiny, this could seduce you to withdraw all your savings quickly, and you may end up vulnerable to poverty in old age.

We understand that Felicity has a private defined contribution pension, valued at is £79,680. She is allowed to withdraw 30% of this fund without tax, and the rest she is taxed. The expert advice is that Felicity withdraws the tax-free 30% (£23904), and purchase a £3,000 annuity that she qualifies for. She needs to keep the rest in pension savings until that time when it earns more interest. Felicity can however withdraw this fund whenever she has any pressing need but needs to avoid withdrawing unnecessarily to avoid being overtaxed on the fund. Fergus does not have a defined pension, so, he should move his funds to a defined contribution to allow him to withdraw 30% tax-free. By transferring at least 60% of his pension to direct contribution, Fergus will reap the mentioned benefit including the ability to withdraw his 30% tax-free when he needs it too bad or when he has a major need for cash.

1. Capital Gain and Inheritance Taxation

Capital Gains

The UK law provides that when selling a property, the owner can exclude up to 250,000 of the capital gain from the tax. This law only applies to sales made after 1997. Felicity bought her small house in southern England when she was only 26 at the end of June 1995. This implies that she is not liable for capital tax gain. She cannot, therefore, claim for exclusion from tax gain (Lusardi & Mitchell, 2011). Even though Felicity lived in the house for the required 5years, she is not eligible because the property was bought before 1997. Therefore, Felicity must pay full capital gain tax on her 250,000 property.

UK Capital Gains Tax rates are 28%, therefore she will pay a capital gain tax of:

28% of 250,000 = 70,000

She will be left with about 180,000 after selling property and paying the capital gain tax.

Inheritance Taxation

Felicity’s parents look forward to leaving her and her sister several inheritances upon their demise. They want to leave them a house valued at 1.3million, cash-based investments 205,000 and ISA 48,000. The parents are however worried about the taxman having their children’s inheritance.

In the UK, the general Inheritance Tax rate currently stands at 40%. The tax rate is normally charged only on a portion of the estate above the threshold.

Let’s give example using Felicity proportion of the real estate inheritance. Say Felicity inherits 50% of the estate; 1.15million of property, 102500 cash-based investments and 24000 ISA, totaling to an estate of (1,300,000+102500+48000) = 1,426,500.

Felicity’s estate, in this case, is 1,426,500, and her tax-free threshold (at 65%) is;

(1,426,500*60/100) = 855900

Therefore, the inheritance tax charge will be 40% of 855900

Inheritance Tax = (40*855900/100)

Inheritance Tax = 342,360

Out of an estate of 1,426,500, Felicity will take home (1,426,500-342,360) = 1084140

1. Investment Portfolios Recommendations.

You will need cash in retirement to cater for your most important needs and basic needs. At age 57 (Fergus) and 51 (Felicity), you will be retiring very soon, in three years and 9 years respectively.

Fergus Portfolio

Fergus will be going to retire in just 3 years, and with a mortgage to pay, basic upkeep, health needs, and others, it implies that he will need this money starting as soon as in 3 years. This implies that the portfolios we choose must be short term. it must start giving back returns as soon as in three years. We will need to invest more, and spend less for a short term strategy to work. Since our objective is to give you income starting 3 years from now, we want to avoid highly volatile options like stocks investments, and go for a surer approach (Johnson, & Simkins, 2014). The objective here will be to go for an income portfolio. We have therefore designed for Fergus an income portfolio to offer you long-term sustainability through a conservative strategy that pays interest and dividend. The objective here will be to generate your income stream that can increase the value and compound your investment. This strategy will give you the protection that you need, to ensure you keep your capital growing and t the same time earning to meet your most basic needs.

Fergus does not like taking much risk, and this reflected in how you invested the £18,000 left to you by your grandfather seven years ago. Our objective is to take back cash invested in premium bonds, cash ISA and other investments and spread to in our new portfolio: REITs and

1. REITs:

REITs, an abbreviation for Real Estate Investments Trusts are publicly traded firms that allow the individual investors to purchase shares in real estate portfolio which makes money and earns interest from several properties. REITs allow you to get a share of the real estate sector, which constitutes corporates that manage, develops, commercial, residential and industrial properties. Measured through the MSCI, the American REIT Index, the 5-year turn of the USA-REITs was estimated at 15.76% as of June 2020. The S&P Index average returns are estimated at 10%, meaning that REITs are far much better investments options because it offers many returns yet it presents low risks. The REITs are normally competitive and the best offers are quickly purchased.

So, in the case of Fergus, we propose the best value REITs having the lowest 12-month trailing PE ratio (price-to-earning). The profits are given back to the shareholders in the form of buybacks and profits, and a low PE ratio indicates that the shareholder is paying lower for every dollar of the generated profits.

So, we propose to Ferguson three specific best value REITs to put your 50% of your available funds including Brandywine Realty Trust priced at $13.9 per share, it is worth a 2.3billion market cap with a 7.5 PE ratio. The second proposal is Equity Commonwealth (EQC) priced at $28.47 per share, it is worth a 3.5billion market cap with an 8.1 PE ratio. Kimco Realty Corp. (KIM) priced at $8.3 per share, is worth an 8.3billion market cap with an 8.5 PE ratio.

1. REITs:

The second proposed investment option is the SCSS (Senior Citizens Saving Scheme) for Fergus. The SCSS scheme is available to senior citizens or those willing to retire early. Anyone above 60 years of age can go for SCSS from a bank or post office. The deposit is expected to mature after every five years from the account opening date, this can however be extended once by one year. as of April 2021, the SCSS interest rate was set at 7.4% per year, and it is payable quarterly (Lusardi & Mitchell, 2011). This investment option is suitable for Fergus since it gives him the much-required liquidity to have money for regular upkeep.

Felicity Portfolio

Felicity has more time in terms of more work period before retirement. Her objective is therefore to invest in a portfolio that high returning, a little more risks, and to make long-term investments. The first most viable option for Felicity portfolio would be to invest in stocks, over the long-term, and expect to get 10% average returns per year for 9 years while still working. The second viable investment portfolio for Felicity would be to buy bonds. bonds are loan to the government, municipality or corporation. Bonds are normally medium-term to long-term investments, with guaranteed interest, giving a steady source of income. Felicity can create a bond ladder with the maturity dates matching her future cash flow needs.

1. Ethan Mortgage Options

Ethan is Fergus’ son, aged 26 years. Ethan lives with his mother, so basically he does not have expenses yet, no rent, no car expenses and no upkeep, we, therefore, assume that Ethan’s expenditures are insignificant at this stage. Ethan has been saving for a deposit to buy property locally. So far, Ethan has saved £6,000 towards the deposit, and his gross salary is £26,000.

Ethan is a first-time home-buyer; he has a relatively low capital starting point. However, Ethan has several years ahead of him to make this right. Ethan’s challenges would therefore be finding a property in the North East of England. Ethan wants a property in his parents’ neighbourhood in North East England. Their parents’ property is currently valued at £390,000. This implies that an average property in this neighbourhood would go for at least £250,000. Nathan only has a £9,000 deposit for his savings. The task is, therefore, to conduct research to find a property that is valued at around £250,000 and to identify a mortgage bank that would take a lower deposit on this property, and spread the repayment over a longer period, considering Ethan’s current and future needs like rentals, upkeep, car maintenance, education, and others, and also factoring that Ethan will be having salary increases with time.

When buying property in England, there are costs that Ethan will have to part with. These include mortgage fees that run up to £1,500, valuation fees of up to £700, property survey cost which is about £500, conveyance fee of £500, and removals costs of £1000. Other costs involve earnest cost, 1-2% of property value, inspection and appraisal fee. These costs vary, and on average one may spend about 10 to 20% of the property cost. On average, Ethan may part with up to £37500 in purchasing a £250,000 property in North East of England (about 15% average).

The chancellor announced a mortgage scheme for first time home buyers to encourage banks to give 5% mortgage deposits. This is the best option for Ethan because he does not have much money to pay for a deposit. At 5%, Ethan needs to have at least £12,500 to qualify for a mortgage with such banks.

Ethan has two options, to go for fixed-rate mortgage charges fixed interest rate in the entire life of the mortgage while the variable mortgage changes depending on several economic variables. The fixed-rate mortgage is more recommendable for Ethan since it brings more predictability with only one source of income.

The most important factor to consider for Ethan is that he must be able to meet his personal needs comfortably and pay the mortgage. Based on research and trends of the England mortgage providers, Ethan would most probably qualify for a 5year loan, paying a 5% deposit, and a significantly high monthly repayment of £1701 at a rate of 4.2%. Ethan must therefore go the extra mile and be ready to rent the home to earn extra income during this period and to take home only a monthly leftover salary of about 466. Depending on the generated income, Ethan can opt to further extend the repayment period, or fast track his loan.