Roger Gibbard enjoying a cup of tea at home in London
Roger Gibbard, 78, retired from his job as a statistician 15 years ago. His wife, Ann, is 79 and hasn't worked since 1969 when she gave up her job to have her child.
The couple live in London and have an investment portfolio worth £330,000, administered by wealth manager JM Finn, an arrangement they inherited from Roger's parents.
The Gibbards' investments have produced a reasonably stable income, growing from around £10,000 a year in 2006 to £13,000 a year now.
Together with their pensions these have been sufficient to meet their outgoings of £35,000 a year which included £8,000 a year of gifts.
However, in recent years the management of the company looking after their portfolio has changed, performance has been disappointing, and charges have cost them more than £5,000 a year, which they say "seems a bit rich".
They believe it is time to appraise the service they are receiving, and possibly make changes. With living expenses rising, the couple need either to increase their income or cut the cost of investment management. Currently 34pc of their income is from investments.
Most importantly for Roger, however, is providing for Ann in the event of his death. She is statistically likely to outlive him by five years, and due to the way employment pensions are structured, she will lose half of Roger's pension and his Disability Living Allowance if he dies first. This would result in her income being slashed by a quarter, which would be financially disastrous. They also want to raise funds, when the needs arise, to contribute to the cost of a replacement vehicle for their son and spend £30,000 on their granddaughter's wedding in a couple of years.
They have several options. One would be downsizing their home, which they bought in 1968 for £8,000, and is now worth about £700,000. But they feel they are too old to do this. They said: "At our ages and having lived here for 47 years we don't regard this as realistic."
Another option would be to start managing his own funds to save money, but Mr Gibbard said: "At this stage in life I consider it unrealistic to consider embarking on a sharedealing career, so guidance would be appreciated."
Equity release is also a possibility for the Gibbards. Roger has done some looking into this and has assessed various providers, but isn't sure where to go next, and is worried it might not be the right choice. He said: "I feel that it would be imprudent to take that option before considering the alternatives."
Pension Doctor says:
Until now the Gibbards' pensions have been sufficient to meet their outgoings of £35,000 a year which included £8,000 a year of gifts.
However, they now want to eat into their capital to gift money to family by £30,000 and they have only £2,000 a year headroom of income above their regular expenses.
And on top of this, the investments will not produce enough income to maintain the same level of outgoings if Roger dies, as his guaranteed pension income would drop. Alan Higham, retirement director at Fidelity, says it will be necessary for them to either increase the yield on the investments, which means taking more risk, or eat into the capital, which means leaving less inheritance to their son.
"It will not be possible to gift £30,000 to family and produce income of £21,000 to meet the £9,000 fall in income Roger estimates will occur on his death simply by changing the investment portfolio," he adds.
"Instead, they will need to draw down on their capital to maintain their spending, so they need to have much less exposure to equities if they are to remain invested."
Mr Higham says a diversified fund focusing on delivering income rather than capital growth would be sensible. "I would be looking at a fund with no more than 20pc in equities and a heavy weighting towards corporate bonds and cash," he says. The construction of a suitable portfolio is the litmus test for the wealth manager, in the absence of a paid financial adviser to do it.
Roger also mentions equity release, but this should be a last resort.
Setting up an equity release loan costs around £1,000.
It will incur a high rate of interest of around 6pc which will be paid when you die. A £50,000 loan repaid in 14 years' time would have grown to £113,000 on 6pc interest.
So as you can see it is a very expensive way of releasing capital and drawing extra income. It would be far more preferable to draw down on the existing capital before resorting to equity release.
Mr Higham said: "Roger should ask his wealth manager if they can reconstruct the portfolio so it is more suited to providing reliable income, and is as resilient as possible to downturns in market values, as they will need to draw on capital to meet their needs. If I were in his shoes I'd be looking for a wealth manager to provide investment solutions suitable for drawing down capital over time, with low capital volatility, while maintaining a decent income level of 4pc to 5pc a year."
Costs are important too.
At present they are paying more than 1.5pc per year in management charges. If they were to use a financial adviser, then their running costs would probably still be around 1.5pc, but at least they would have a qualified professional to fall back on, which could be a very valuable service for Ann. There would though probably be an up-front fee to pay as well of around £2,000.
Mr Higham says: "It would be worth Ann checking what state pension she will get after Roger's death. It may rise because she could inherit some of his state pension and it might increase because she can derive a higher basic state pension in her own right from his national insurance contributions."
And finally, an annuity could be considered for some or all of their portfolio. It has the advantage of producing a secure income for life. It could be bought now to pay out until both die or it could wait until he dies and capital used to buy the annuity in just his wife's name then.
An illustrative quote suggests they could generate £17,500 a year now from an annuity purchase of £250,000 which is paid until they both die. They would have £80,000 of capital remaining: they could keep some in secure term deposits as well as gifting to family.
It would increase their income to around £44,000 a year now, assuming they gifted £30,000 capital and retained £50,000. It would also carry on after the husband's death and give his wife income of around £32,000 a year (assuming that she receives 50pc of all his pension income and loses the disability allowance). They may receive a much higher annuity income on disclosing their general health and lifestyle.
The Telegraph
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