Mr and Mrs Cox, a married couple aged 74 and 73 respectively, are both non-taxpayers, retired and have no private pensions. They have a total of £36,262 in bank and building society deposits earning £148 interest each month which they rely on heavily to maintain living standards. They have no children but do have relatives they wish to leave their estate to. What advice would you give to them?
The couple were referred to me a little over two years ago because of their growing concern that they had been dipping into their capital over recent years. Interest rates were falling and living expenses were rising constantly.
They were, in fact, fearful of falling into the poverty trap. Unfortunately, this is a very common problem, often further exacerbated when the first partner dies by reducing income for the survivor.
The solution centred on one very typical key situation for many retired people. They were relatively asset-rich and cash-poor. Moving from their house, valued at £140,000, was not considered as an option because this would not really provide much free capital after expenses and they had many friends locally.
They wished to increase their income while maintaining capital growth to counter inflationary erosion – and all through lowto medium-risk investments.
An equity-release scheme was arranged, allowing 25 per cent (£35,000) of the property value to be released for investment and income, without any interest payable until death or sale of the property.
This cost £500 to arrange and Mr and Mrs Cox were made very aware of how the final debt is relative to the increase in property value to the date of sale or second death. Although this could prove costly if house prices rise significantly, the fact that there was no cost directly to the clients and that the debt could remain static if house prices fall or remain static was of comfort.
Other issues such as long-term care needs were discussed but it was agreed that the priority at this time was to improve cashflow to take away the obvious financial worries that were preying on their health and well-being.
As this was close to the end of the tax year, the following investments were made.
l Each of the couple invested in two Isas. The total investment of £24,000 was split equally into the ABN Amro high income and Henderson preference and bond funds, providing a monthly income of around £140 with limited potential for rising capital and income over the longer term, depending on bank rate movements.
l A total of £30,000 was invested into the Royal & Sun Alliance with-profits bond. Taking 3 per cent income, this provided a sum of £75 a month while also retaining good potential for capital growth and increased income over the longer term.
l The balance of £20,762 was placed in a postal account paying 6.25 per cent interest – equivalent to more than £108 a month.
The overall result is that they have now increased their income significantly. They could even spend some capital on a car, holiday or whatever and still have ample income to cover their current needs, while retaining the potential for capital growth to sustain increasing income needs in the future.
All in all, Mr and Mrs Cox are happy that they have improved their living standards without the need to lose their dignity or friends. Since then, they have seen their investments rise in value overall, while also enjoying a holiday in Australia to visit relatives.