Gifting the Inheritance Away

I have two adult sons who have both done fairly well for themselves but have followed very different paths.

The eldest has lived in rented accommodation in London since graduating. At first he lived with a succession of house mates and then a long-term girlfriend but he is now on his own which is very expensive but at 31 he feels he needs his own place. He has a job that pays him well enough to live in London and has paid off his student loan but he has never saved beyond a few hundred for his next holiday. Recently he has become very disillusioned with his career (a para-legal job in the health services). His salary is barely creeping up, promotion prospects are poor and his pension is being down graded quite drastically. Basically he is bored, burned out and bordering on unhappy.

My youngest son has not yet ventured out of full time education after moving from a degree to an MA and then a PhD which he is just finishing. He has done some teaching work along the way but has mainly been funded via scholarships and bursaries which he has won due to hard work and excellent academic results. He actively enjoys living frugally which has helped. His friendship group is large and very supportive and he's very happy where he is.

Both my sons have a potentially life-shortening genetic illness. I mention this because it does make a difference to the decision-making process that my husband and I have just gone through. We have decided
to give/gift/pay out around half of our ISA savings to our sons now, when they need it, rather than continue to save it in case we have a "rainy day" (whatever form that might take).

As we aren't even proper "pensioners" yet we haven't really thought much about inheritance. We don't expect to end up paying any inheritance tax given that a surviving married partner also inherits their partner's unused allowance so this means that the total estate would need to be over £650,000 before any is due? Someone please correct me if this is wrong.

But in any case the timing of inheritance is something over which you have no control and doesn't fit in with anyone's plans. Why would we want to sit on cash "in case" when there is currently a valuable use for it. Waiting till we die to pass the money on to our sons makes less sense the more I think about it. We have around £70,000 in our ISAs which only form part of our retirement plan in that it would be used to provide a small amount of income (maybe about £3,000 a year) and be a care-cost buffer if we need it. In actual fact the costs of care are so astronomical that if residential care were to be needed for either of us on a long term basis, whether we had £35,000 or £70,000 would be soon become academic because it would vanish in such a short period of time. This is a scary thought but it does mean that keeping the ISA funds for this purpose doesn't make a whole lot of sense.

So we have decided to manage the money so that our sons can have around £17,500 each over the next couple of years. My eldest son can then leave his job and do a Masters in a subject he will enjoy. The change in him since we talked about this and told him of our decision is remarkable. He's full of enthusiasm and plans for the future, whereas before he seemed to be losing his naturally positive outlook on things. I defy anyone to tell me that this is the wrong thing to do.

I need to do some work on how we can do this and what would be the best way to "gift" it. I also need to bottom out which bits of our ISAs to sell and move into cash, whether to give the money as lump sum(s) or regular payments and investigate implications for taxation. In addition to the money my eldest son will hopefully be living in our studio flat for a year whilst he does the course so I also need to work around the loss of the rent for that period. Back to the spreadsheets.

In the middle of all this I'm expecting to put in my application for VR during the summer which might, or might not be accepted. Interesting times :-)

Having My Hand Forced... Probably a Good Thing?

Virtually as soon as the election result came in the managers in my section issued invitations to 1-1 sessions with all staff above a certain grade and announced the fact that we are to be offered Voluntary Redundancy in the summer to take effect from April 2016.

It has been on the cards for some time . We have been steadily bleeding staff for several years and yet more savings need to be made in order to accommodate the next round of government spending cuts. Given the fact that this government now has an overall majority there is also a strong likelihood of privatisation and/or outsourcing of services.

In order to keep a basic level of service going, front-line staff who deal directly with the public, are being protected as much as possible from the cuts, although there has been a significant drop in numbers here too. This means that those of us who look after the infrastructure are being targeted.

Don't get me wrong, it would probably be a blessing for me personally to be accepted for VR. In the past people over 55 have been given the chance to choose to go as part of "efficiency savings" rather than be made redundant, which means that they have been given access to their pension immediately and without reduction. This would be an absolute godsend to me as I would receive my pension, as accrued up to date (around £8,500 pa) from next April. Happy days :-). However there is some doubt that the same rules will apply this time round as letting people have their pensions early is very expensive when compared to making them redundant.

We are currently waiting to find out what the terms of the offer will be, but in the meantime I am left with a bit of a dilemma. If I am offered the the redundancy pay only and no pension would I accept? My redundancy payment comes in at around £20,000 but taking it would mean that I would not get that final year of work which adds £500 extra to my pension for life. I'm still running the numbers and going back through the calculations I did last Oct, with the added complication that I've now decided to take my LGPS pension early. At the forefront of my mind is the vision of what working in my small section would be like, given that we are due to lose half the senior staff. That level of stress is not attractive at all. I think I'll be able to find the money somehow :-)

Of course I may not get accepted for VR if there are "cheaper" people who would like to go, or if it's considered too much of a risk to lose me. On the other hand I may get sent down the path of compulsory redundancy anyway if not enough people take up the offer. The next few months will tell. I will certainly feel much happier when I know exactly where I stand. The uncertainty doesn't help my financial planning though, specifically around the choice of funding AVC's as against SIPP. Watch this space.

Happiness is a warm "hygge"

In case you haven't come across the word before "hygge" means coziness, friendliness, peace of mind, belonging and social acceptance and it seems to explain, at least partially, why a recent eurostat report found that retired Danish women are the happiest people in Europe.

Eurostat -  Overall Life Satisfaction.

Contributing factors which encourage this state of affairs include the fact that the Danes have the best pension system in the world (as measured by the Melbourne Mercer Global Pension Index) the existence of social support networks, affordable child care facilities, good healthcare and a strong welfare system.

Denmark's pension system comes out with an overall score of 82.4 according to the  Global Pension Index which measures schemes on adequacy, sustainability and integrity according to a points system. The UK is currently in 9th place with a score of 67.2 (2 points up from the previous year due to auto-enrolment and rising contributions.) It will be interesting to see how the new flexibilities introduced this year affect the score. Despite falling out of favour in the UK, annuities are still widely bought in some of the higher ranking countries with 85% of Danes purchasing one, although some countries such as Australia (77.8) also do pretty well on more flexible systems like those being introduced here. In any case, having a secure, regular and guaranteed income must be one of the biggest influences on a general feeling of well-being and go a long way towards explaining the contentment of retired Danes.

In addition to a reliable pension system Danes "may pay some of the highest taxes in the world but they are rewarded with generous public services and a world-renowned welfare state." and "in Denmark grandparents are not faced with a second career as a childminder, unlike in the UK, where 47% of grandparents look after grandchildren and one in four working families rely on grandparents for childcare¹."

Being female is also key to the happiness quotient. The authors of the report think this is probably because women tend to make strong and lasting friendships and are more likely to have social interests and hobbies outside the home when they retire.

Another interesting fact revealed in the report is that the poorest 20% of Danes are happier than the richest 20% of Greeks which adds some weight to the idea that social stability and a well-functioning welfare system are bigger factors influencing happiness than personal wealth.

On a global scale the World Happiness Report "reviews the state of happiness in the world today and shows how the new science of happiness explains personal and national variations in happiness. It reflects a new worldwide demand for more attention to happiness as a criteria for government policy."

The criteria used to measure the happiness of citizens can be summarised in the following way:

"The happiest countries have in common a large GDP per capita, healthy life expectancy at birth and a lack of corruption in leadership. But also essential were three things over which individual citizens have a bit more control over: A sense of social support, freedom to make life choices and a culture of generosity." ²

An extract from the report's summary of Chapter 8 caught my attention with particular reference to the recent election.

"Well-being depends heavily on the pro-social behaviour of members of the society. Pro-sociality involves individuals making decisions for the common good that may conflict with short-run egoistic incentives.... Societies with a high level of social capital – meaning generalized trust, good governance, and mutual support by individuals within the society – are conducive to pro-social behaviour."

If Mr Cameron is looking to increase the overall well-being of the nation and move us up the chart, rather than down, over the next 5 years, (which surely sums up the job of government?) maybe he should download a copy and study it well.

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1 http://www.theguardian.com/world/2015/apr/28/female-over-65-and-danish-the-three-keys-to-happiness.
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2 http://www.huffingtonpost.com/2013/10/22/denmark-happiest-country_n_4070761.html^↩

April 2015 Update

Portfolio update here.

There's been a bit of choppy water this month with a small lurch downwards in the last few days. The outcome is that my portfolio has dropped around 1.5% from where it was in the middle of April. However performance is currently looking like this  - which I'm more than happy with.

	Holdings	GBP Value	% of total	Performance
				1m	6m	1y
As ISA	16	£50,917.29	22.37	-0.40%	12.80%	17.00%
Js ISA	6	£19,028.82	8.36	-0.30%	7.40%	16.50%
Sipp Pension	7	£34,525.26	15.17	0.60%	7.60%	10.90%

Big60Million 

We haven't added much to our investments this month due to the fact that I "borrowed" from our cash reserves in the Santander account in order to boost my Sipp at the end of March and we have also spent £4,000 on a new "to us" car from the same account. My priority at the moment is therefore to rebuild our cash. This will continue next month, although I have got my eye on the Big60Million Investment Bonds which are paying 6% and look very interesting. The closure date for applications is the 27th May so I need to get my skates on if I'm going to take the plunge.

You may have noticed that I have moved the target on my Sipp tracker on the right down from £50,000 to £35,000. This is because I have decided to take my LGPS defined benefit pension at 60/61 rather than hang on till 65. So, I am virtually at target with both ISA's and SIPP. From that point of view the job is done. The only piece of the picture that is missing is the increase in my pension I gain by going to work every day. I need to work for two more years in order to add another £1,000 onto my annual pension. Because the LGPS is now a "career average" pension we earn 1/49th of our salary in pension each year so I am adding around £530 for every extra year that I work. It feels very generous (and I'm sure it is compared to how much someone would have to put into a DC pension in order to generate this amount especially as it is index linked).

I have been thinking about all this in relation to a comment ermine made on my last post about time having a "different sort of cost" and how it's a struggle to balance things up. Breaking the calculation down shows me that for every month I continue to work I am being paid, not just my salary, but £45 extra per year for every year I live after retirement. It doesn't sound a lot, and maybe it isn't. Some days it doesn't feel like it is worth it and I start to think about rerunning the figures and going earlier, especially as I am currently suffering quite badly with a trapped nerve in my neck which (according to my physio)  is due to sitting at a desk using a PC for far too many years. The physical pain of sitting at my desk is wearing me down at the moment, and that is even before I have to sit and see first hand what the next round of spending cuts will do to the service I help to provide. A prospect which wasn't made any easier by reading Paul Krugman on The Austerity Delusion.

But for the moment it's business as usual and the end of March 2017 remains the date I am heading for, I can't deny that the temptation to cut and run sooner is definitely there though :-)

Fire Fighting after FiRe - How to Manage an Emergency Fund when the Salary Stops.

The standard advice about a emergency fund is that it should contain 3 to 6 months' worth of expenses (or even more - for a heated debate on this take a look at this recent MSE thread). The reason given for needing to keep this amount of cash is "what if you lose your job?" However, by definition, this can't happen in retirement (although there are many flavours to FI, some of which will involve earning an income of some kind). At this point we need to rethink our calculation and reassess our actual requirements. Will we need an "emergency fund" at all when we are drawing a pension or living on savings/investments? If we do need one how should we assess how much we need to keep in it, and, crucially, how do we top it up when it gets depleted.

There is an interesting discussion about this on "Get Rich Slowly" - Is it Possible you don't need an Emergency Fund which started me thinking about our own situation. What kind of emergencies could we encounter?  - fire, flood, pestilence (a plague of pigeons :-))?  but anything catastrophic of this nature would be more than likely be covered by insurance. Medical emergencies figure heavily for Americans - according to Lisa's figures they represent the most common financial emergency, but they shouldn't cause so much concern to UK citizens. (However who knows what the future might bring regarding the NHS. As an aside one of the main reasons we would like to have a fair amount left to pass onto our sons is that they both have an inherited medical condition that could mean they have periods when they can't work in the future, or need drugs that the NHS will no longer supply. This worry and the threat of the possibility of one or both of us needing care home support is why we would like to leave our ISA funds in tact for as long as possible - so maybe this is a form of long-term medical emergency fund in itself.)

Our emergencies are most likely car, white good or kid related. I do not count holidays as an emergency (although taking one sometimes is :-) - probably not so much the case when you retire). Holidays, despite being paid for in chunks of cash, will continue be paid for by credit card when we retire and have been accounted for as part of our day to day expenses. Thinking about what has happened in the past and when we have unexpectedly needed cash it has generally been to make loans to the kids (some paid back, some not) for things like clearing student overdrafts, help with rent deposits and prop-ups so that they could complete their education. We have not (as yet) joined the growing number of parents who have helped their kids with buying a house but several of my friends have. If we do go down this route though it won't be an emergency. So, in the past the kind of figure we would be looking at that we might need at short notice could be up to around £3,000. In certain situations this could happen maybe 3 times a year - major car repair, fridge and telly both pack-up and the dog needs an operation.  This semi-educated guesswork gives me a figure for our own particular emergency fund of £12,000 going forward. I'm happy with that, it can continue to sit in our "high" interest Santander 123 account and hopefully seldom get touched.

But that's not the whole picture. In addition to this I do have to look at the bits of our income post retirement that aren't guaranteed. From when I retire at 58 and until I'm 66 and my state pension kicks in not all our required income will be coming from guaranteed sources. We will be relying on our rental income and dividends from our ISAs to make up between 30% (58 to 60) and 15% (60 to 66) of our £30,000 income. Neither of these sources are sure-fire or inflation linked. They are liable to fluctuate and may not always be available, or we may not always want to take them. In the case of the rental income we may have an extended void period or large repairs that eat into the rent. (I do only ever assess the annual income from the flat on 10 months' worth of rent but I want to be super careful here). In the case of the ISA dividends we might want to take advantage of a market drop to plough them back in and buy when things are cheap, rather than depleting the funds when they are low. In these situations extra cash in the emergency fund might come in handy.

Given that between £4,500 and £9,000 of our income over those 8 years is not entirely secure, it probably makes sense to have at least a years' worth of the average required (£6,750) available in the emergency fund. This should be added to my original £12,000 and can all be fitted into the Santander 123 giving a total emergency fund of £19,000.

So, I have my figure, we need a £19,000 cash emergency fund until I am 66 when it can probably be run down slightly. Getting the cash into the fund is doable - we currently have just under £14,000 as we've just used some cash to change the car. Making up the extra £5,000 won't be a problem over the next few months before my husband retires. The question that bothers me is how to keep it topped up once we have both retired and are maxing out our income. The whole point of the fund is that it will get used - although it would be nice if it didn't - so how do we fill it back up to comfort level when it does?

The only solution I can think of is to make a point of moving any capital gain from the ISA into cash as and when it becomes available? I have been doing a bit of rebalancing recently using a couple of funds that have made over 25% gain, sold some stock and bought more of assets I'm still a little low on. Should the same strategy be used to keep an emergency fund at the required level? It certainly makes sense from a "sell high" point of view and the whole point of the emergency fund is to avoid a situation whereby you are forced to sell when stocks are low. Of course the potential for more growth is lost by moving down into low interest cash but you are at the same time dodging the bullet of real loss if you need to sell at wrong time. I'm proposing the following sequence of events:

• Son needs help with the airfare and living expenses for interview and then relocation in Toronto (this might actually be happening which is very exciting :-) He's just finished his PhD and is applying for a research position there.)

• Remove £5,000 from the emergency fund 

• Check ISA for any funds that are showing signs of good growth (this is independent of any ongoing asset rebalancing that is going on).

• Sell an appropriate amount of any funds that are showing more than a pre-defined amount of growth (15%, 25%?)

• Top up the emergency fund

• If everything in the ISA is showing red do nothing, wait but rebalance ISA annually as usual if necessary. Wait. Wait. Hope emergency fund holds out despite deciding to use cash from it instead of taking dividends out of the ISA during the bad patch. Wait.

• Breathe sigh of relief as markets start to rise again. Wait for strong growth and eventually take some profit and rebuild the emergency fund.

Any other ideas anyone?

Wealth and Glamour - the "Chelsea" Effect

I had a rare (and brief) "reality shift" into the high life last weekend whilst visiting my son in London. We went out for a fantastic Sunday lunch at a semi-exclusive establishment which cost much more than I've spent on eating out for a very, very, long time. We had champagne cocktails to start with, a bottle of good wine and all the extras. I really enjoyed myself. Strangely, and a little uncomfortably, the large bill almost added to the enjoyment. After the "high" of the experience died down I began to wonder what it was that I had actually paid for?

Like anyone who makes a habit of being aware of how they are spending their money I automatically question the value of what I buy and weigh up if it's "worth" what I'm paying. I admit that this calculation, for me, is not always as simple or as "pure" as it is for some FI'ers. I'm quite happy to add factors into the equation that could be regarded as self indulgent or self-defeating from a FI point of view - time being a frequent consideration. For example, I might buy something at one supermarket that I know I could get cheaper elsewhere, just because I am already in the shop and it would take a chunk out of my free time to save the difference. Not worth it, in my view. Similar calculations about value might include stress-reduction, health, quality and social responsibility. It's not as simple as pennies and pounds.

But when I think back about the meal at the weekend I realise that one of the things that I must have been including in my calculation of the "value" of the meal was the glamour of the whole experience. "Glamour" is an interesting word. The archaic meaning is "a magic spell, enchantment or charm" but modern definitions refer simply to "exciting" or "attractive" and current usage of the word definitely tends to overlay associations of the excitement and allure of wealth. Was I happy to pay more purely because I was seduced by being part of all that affluence, was I paying to be "glamoured" (anyone a "True Blood" fan?) - I suspect so. That's not a comfortable realisation.

Co-incidentally "Made in Chelsea" is back on Channel 4 this week. It is a (very) guilty pleasure of mine, watched alone and in secret, seldom talked about or admitted to :-).  For those who haven't come across the series it is a structured-reality show featuring a group of very attractive twenty-something year olds living in London with more money than they can handle, no responsibilities and no grip whatsoever on what life is like for the majority of their contemporaries. Strangely enough, despite all the champagne-swilling, holidaying in Barbados and shopping in exclusive boutiques they seem no happier than "ordinary" people and they spend as much time obsessively discussing and dissecting relationships, crying, falling out and making up again, as young adults in all walks of life.

However the overiding theme of the show is "glamour" and the cult of the mystique of wealth; not what money can do, or buy, but what having money makes us into. Somewhere along the line we seem to have bought into the delusion that this equates to attractive, charming and happy. And that, apparently, includes me .... (or at least a small part of me :-))

Made in Chelsea cast (Facebook).
Mark-Francis (second from the right) expresses his disdain for the sort of people who would order beer-battered fish and chips: "You'd leave before they'd even finished the sentence!" he gasped, his face contorted into utter disgust.(digitalspy)

Defining the Benefit. When to take a Defined Benefit pension.

Timing risk and when to draw a Defined Contribution pension are well documented. I was fascinated to read RIT's recent post on this in which talks about SWR and links to a video which uses historical data to illustrate that when a pension "pot" is put into drawdown is a major factor in determining whether or not it will last and that no withdrawal rate (whether 4%, or even less) can be regarded as "absolutely" safe but must be assessed in the context of the "value" of the markets at the time the pension is taken.

I was fascinated, but in a detached kind of way, because this kind of deliberation about "when" has never been considered necessary for those of us lucky enough to have index-linked DB pensions. Received wisdom is simple - never take a DB pension before scheme payment age if at all possible, actuarial reduction is to be avoided at all costs. But I've been thinking about this recently and have come to the conclusion that deciding when to take a DB pension is not that simple after all. We may think that it is but that is only because, unlike with a DC pension, it is easy to count the cost of taking the pension early, when what we should actually be doing is making some effort to measure this cost against the benefit.

As an example my own figures come out like this: (I currently have £35,000 in my SIPP and was intending to boost this up to around £50,000, retire at 58 and defer my LGPS till 65).

• Pension if I take it at 65 - £9,300. Tax free lump sum -  £13,000. (When taken this this would be partly subject to 20% tax as I have a small amount of rental income, plus state pension would become payable at 66).

• Pension if I take it at 60 - £7020. Tax free lump sum - £11,500). (This would be taken tax free until 66 as I intend to pay myself just enough out of my SIPP to take me up to the PA).

As I would get the pension for 5 years longer if I take it at 60, I will start to go into a "loss" at age 75 when I will be £2,300 pa worse off. I would therefore be down by around £35,000 if I live to 90 and this loss would increase year on year. Sounds like a bad deal and I should not even be considering it as an option if I can avoid it?

But what this calculation doesn't take into account are the benefits attached to:

• Not having to stretch our finances to allow me to retire at 58 (in other words, the pressure is off as I already have enough in my SIPP. In fact I shouldn't put any more in there as I am already at the limit of what I can use tax efficiently should I decide to access my LGPS at 60)

• Being able to take advantage of a tax free lump sum of £8,500 from my SIPP at 58 which could be re-invested in my ISA, in whole or in part. The rest of my SIPP would adequately fund the two years before I taking my LGPS.

• Being able to access my LGPS tax free lump sum and AVCs at 60 instead of 65 (when my husband would be 71 and we may not be able to put it to such good use). My TFLS/AVC fund currently stands at around £16,000 but could be bumped up to £25,000 by paying what I was going to put into my SIPP for the next two years into my AVC instead. (It is a perk of the LGPS pre-2014 that the whole of the AVC fund can be used to boost the tax free lump sum - subject to certain upper limits that don't apply to me).

• A big part of my income between 60 and 65 would be index-linked and risk free (via the LGPS) rather than managed myself via my SIPP (and therefore subject to market risk or inflation risk if I move it down into cash).

All the above add up to a clear win, for me, to taking my pension early despite the 24% reduction. This win is personal and depends on my lifestyle and situation, what it actually costs in monetary terms is just one of the considerations. After thinking it all through I'm pretty sure which way to go and have revised my targets accordingly. In fact the only one that I haven't yet hit is the one that means I need to add another £1,000 pa to my LGPS pension and that is simple to satisfy  - I just need to keep working for another 2 years.  

On a more general note, if things stay as they are with DB pensions and public sector ones in particular - which is unlikely but does provide food for thought - then it seems probable that some sort of "retirement age" gap could grow up between those with DC pensions, who let the decision on when they want to retire drive their saving and investing plans because no-one can actually tell them in advance what will be the best time to go, and those on DB pensions who just "expect" to have to stay in work until they reach scheme retirement age (which is increasingly being brought in line with State Retirement Age). Of course, there is nothing to stop DB pensioners funding (slightly) early retirement but it does need the foresight to set up an additional personal pension, a fair excess of salary over needs and a willingness to confront the horned beast of actuarial reduction, and assess the benefits of taking a hit on total pension received, in the context of the whole retirement plan, rather than with "just don't do it" blinkers on.

Knowing the financial cost of something is an advantage, but it can be a brake in just the same way as not knowing can (and maybe even more so). When deciding when to take a pension we should all make sure we take due diligence with our cost/benefit analysis and never forget that the only thing we can really be sure of is the value of time.