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Lump of sugar

A new client has come into a large sum of money. She has never before had the need for financial advice. What is the best approach to someone in this position?

When a sum of money is received as a result of an inheritance or from the sale of family property, people can find themselves facing decisions that they have never had to make before.

Sarah and Gareth are two such clients. Following the sale of some family property, Sarah had a few hundred thousand pounds to invest.

Sarah is 15 years older than Gareth and they have two children. Their main objective was to see if it would be possible for Gareth to retire earlier than the expected normal retirement date of 65 so that he and Sarah could enjoy a longer period together in retirement.

They also wanted to pay off their children’s student debt and give them a small lump sum to help them on their way to property ownership.

My initial approach was to gather information about their current investments, which were not large in number, and to consider the position on their pensions.

I asked them to produce a budget of what income they were likely to need in retirement, so we could make sure the planning took into account their desired outcome. This is always an interesting exercise, as few clients know exactly where they spend their monthly income. It is also true to say that while some expenditure falls away in retirement, such as mortgage repayments, some expenditure increases. This might be connected with leisure activities such as travel or taking up a hobby that requires capital funding.

When I looked at their budget, I took into account that many of the major items of expenditure, such as council tax and utility bills, tend to increase by more than inflation, so even an index-linked pension may not keep track of clients’ real income needs. Inflation can be a big effect on retirement income.

When I had all the information in front of me, there was the laborious exercise of sifting, analysing and reviewing it. This provides the basic platform from which to construct specific advice.

When I looked at the quantity and nature of their investments and pensions, I could see that retirement for Gareth at 60 was not only possible but they would also be able to consider an earlier age, possibly as low as 55.

This was a revelation to the clients, as it meant they could look forward to spending at least five more years together in retirement and possibly 10 more years. It is nice to break good news.

In terms of the requirements for their children, these could be managed as well as the retirement plans.

I was reassured to note that both the pension schemes could provide tax-free cash sums for the clients if that should be required at some stage in the future.

An interesting debate would be whether it would be advisable for them to commute these lump sums to an inflation-linked income stream, given that they had now a substantial amount of money that would enable them to meet any capital expenditure. This is a debate for a future date.

With clients who are approaching this type of planning for the first time, it is important to work at a speed which they find comfortable. The logic of the arguments needs to be conveyed carefully so that they can see the patterns that develop. This will give them confidence in terms of handling their money. This is where the skills of an experienced planner really work for the client.

The plan that I produced was reasonably tight but with some give to it. Regular reviews to ensure they take up tax breaks are essential to make sure that they do fulfil their retirement dreams.

Amanda Davidson is a director of Baigrie Davies

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