A friend recently asked me if I could have a word with his brother-in-law, Ken, who would soon be reaching age 65. Ken needed some help with his ‘pensions’; I said he should talk to Pensions Wise, or even better appoint a financial adviser. He doesn’t trust the latter, came the reply. Anyway, after some arm-twisting I ended up having a coffee with him.
I opened the discussion asking what his retirement plan was. It turned out he was a building contractor and although he felt he should slow down “slightly” he had no intention of what he called “retiring” soon.
Ken has three pensions with a combined value of about £90k but the way he described one of them I was convinced it had a Guaranteed Annuity Option. I gave a description of what options could be available and the tax implications but he needed to ensure the providers would offer the options he wanted. I enquired what Mrs Ken had by the way of pension provision – he had no idea.
I stressed that he had to be aware of what the terms of the Guaranteed Annuity Option were, and when it applied. He felt uncomfortable with having a regular income if he was not going to retire, despite being told that a Guaranteed Annuity Option could provide one of the best financial deals he could benefit from. But then he dropped a bombshell.
Before he could retire he had to sort out “the houses”. It transpired he owned three properties and he wanted to maximise their value. He lives with his wife in house One; houses two and three he rents out.
His first priority is to modernise house two as he feels it will be the ideal retirement home for Mr & Mrs Ken. Then he wants to extend and modify house one which will become two self-contained apartments. Having completed that, he will then begin to work on house three which is on a large plot of land that he wants build an additional small self-contained two-bedroom house on. When this development work has been completed he will have the retirement home he desires and rental income from four homes.
The three houses currently have a combined value of close to £900k, but he has mortgages of £150k on them. He was hoping to cash in his pension policies to provide the capital to begin his proposed developments.
So now the conversation has changed completely. We were now discussing cash flow, mortgages and taxes. How much would each development cost him, how would he finance it, but what if he suffered a sudden loss of energy or working capacity?
Having working income, rental income, and the possibility of additional income from his State pension means he is well into a higher rate income tax band. This means he has an added problem of the interest on his mortgages being gradually restricted to basic tax relief between now and 2020. This then bought out the fact he was currently not operating in the most tax-efficient way. £60k of the total £150k worth of mortgages was on house one, his main residence. He could not offset the interest on that mortgage against the rental income.
My advice or should I say guidance to Ken was as follows:
- Find an accountant. Currently he just engages a bookkeeper to do his accounting for his self-assessment tax return. From what he was telling me, it did not feel he was currently making the best of the tax allowances available to him.
- With the help of his accountant develop an outline business plan to take account of the property developments he was planning to make.
- With the help of a mortgage adviser, find out the best way of financing the developments he wanted to make. I suggested he should be talking to a mortgage adviser who could also advise on the range of later life mortgages that are now available. Because of his age, his uncertain income and other factors he should consider, what would happen if he suddenly needed to stop working?
- Then there was sorting out his pension policies, how could he maximise the benefit of the Guaranteed Annuity Option, and how could he most tax-effectively withdraw his pension monies to support his plans?
- His £900k property portfolio will be worth considerably more once the developments are complete. Should he be talking to an adviser who specialises in estate planning?
- But before doing any of the above, he should talk to Mrs Ken. The more income she has, particularly if it is guaranteed, the bigger difference this would make to the delivery of Ken’s plans.
What I was led to believe to be a simple conversation about pension options, turned out to be nothing of the sort, and you can guarantee there are thousands of older homeowners, viewing a forthcoming retirement, in a very similar position. If you’re not directing some of your advisory business at this demographic then you are undoubtedly missing out.
Bob Champion is chairman of the Later Life Academy (LLA)