Finance Blog: Neston & Beyond - Get Time On Your Side Part 2 - Reality
|Published: 9th May 2014 18:10|
9th May 2014.
Last week, we took a look at the financial 'Catch 22' that is the norm for many these days, particularly younger folk. This was if you saved from income for retirement, then you might not be able to afford to buy or rent a home. However, if you bought a house or rented, you couldn't save enough to retire with. The main point I was trying to make is to get time on your side. If you start saving sooner, perhaps before buying or renting a home, then it will stand you in good stead later in life. The item was all a bit theoretical, and that was the intention, and you may recall I offered a possible solution for perhaps parents or grandparents to save for children or grandchildren. This week however, is the real thing.
The circumstances that gave rise to this plan may at first glance seem unique, but try and spot the principles at play, and it could be applied to a great many families I'm sure; just needs those involved to think about the longer term.
The names are fictional but the sums, procedures and timescales are accurate.
Uncle Albert had lived a modest life, and he and his wife lived within their means, which was the wages of a worker in a not overly prosperous part of the country. Although income was not high, Albert paid his rent and saved up what he could. For fun, he started buying shares. Very small amounts, a couple of pounds worth at a time to start with; he enjoyed the 'sport' of shares.
In the same way many follow football or cricket, and spend money to see their team play, Albert spent his spare money, as little as it was, on shares, and reading the financial papers about the 'teams' he was following. It was his hobby; his sport. When much older, he stopped buying, but held on to what he had.
Albert didn't have children, but was close to his niece and her daughter and grandchildren. Following the loss of his wife, Albert willed his estate to his niece, and he passed away in 2002. After the usual estate costs, the value of his savings was around £130,000, and apart from a small legacy to another relative, this was left to his niece, Sylvia.
Sylvia and her husband were retired, owned their own home outright, had secure pension income and savings, although by no means wealthy. They felt they didn't need this money, and enquired if some arrangement could be made to use the money to improve the lot of their daughter and grandchildren, but not allowing it to be spent too quickly. The three grandchildren were in their twenties at the time. This is the point at which I met the family.
There is much detail I will not bore you with but the upshot was the following plan was put in place. Sylvia instructed a deed of variation to Albert's will. In effect, Sylvia renounced her entitlement under the original will, and instead arranged some immediate cash legacies to her daughter and her grandchildren, but also established a discretionary trust. After the legacies and costs, the sum of £82,000 remained. This sum was held by the trust and invested for modest growth in such a way as to require no annual tax returns. Each year, in memory of Uncle Albert, capital was appointed from the trust to each of the three grandchildren to fund a pension contribution. The differing ages and employments of the three meant use was made of 'Stakeholder' pension rules. This meant a gross pension contribution of £3,600 was paid to each of the three pension funds. Whilst held by the trust, the funds enjoyed good growth, and the payments to pension funds meant tax relief was obtained, and further growth was hoped for.
We can now fast forward to 2014. The last remaining funds in the trust have been distributed, the trust closed, and a final contribution made to each of the three pensions, with a small amount of cash left over to have a family meal out.
Following the final payment, the sum value of the three pension funds was £187,046. The grandchildren are in their thirties, all paying their own way, but now have around £62k each invested in a pension fund, and they cannot access this until they are at least age 55. Hopefully, the value will grow over time, and if death should befall one of them before accessing the funds, then it exists as a valuable form of life assurance for their own partners and children. If we had growth of 5%, over 25 years, each of the three funds would go on to be worth around £220,000. Allowing for inflation, in today's terms this is around £133,000, a healthy sum towards a secure retirement, or indeed to pass on again to their children, and their children's children...
I'm not suggesting blowing the family allowance on shares, but just give thought to the benefit of saving, however you do it, but for the long term.
It just takes time, (and the avoidance of football).
Bye for now,
Disclaimer: 'Neston & Beyond' and similar articles written by me are my personal views and the sole aim is to where possible inform, sometimes amuse, occasionally entertain and hopefully, if all else fails, at least be interesting. In no way can any of what you read here be taken as advice of any form, be it parental, lyrical, electrical, prognosticative, desirable, ichthyological, astronomical, factual, governmental, statistical, financial, legal, marital, occupational, political, philatelogical, sociological, incidental, accidental, fiscal, zoological physical, biological, medical, dental, accidental, haberdasherial, cosmological, or tangential.
John C. Cartlidge
Tel: 0151 336 6610