Money Makeover


13th April 2015

As featured in
The Telegraph

Self-employed Karen Thomson, 58, has no plans to retire. She wants to downsize to improve her security but she must wait until her daughters can afford to fly the nest.

Like millions of older self-employed people in Britain, 58-year-old Karen Thomson has no plans to retire any time soon.

Karen, who runs a thriving small-business consultancy, is in a better financial position than a lot of people her age. But she still has some very valid concerns about her future security.

She earns enough to pay 40pc higher-rate tax and has amassed a 200,000 pension. She is recently divorced and has retrained as an animal behaviour expert, giving her the option to establish a lucrative sideline business.

She currently rents a four-bedroom Edwardian detached house in Bromley, south London, for 2,000 a month, which she shares with her 24-year-old twin daughters Lohan and Jordan and her four dogs, Max, Frankie, Joey and Bonnie.

To shrink her outgoings and improve her financial position she wants to downsize to a smaller three-bedroom property further out into the countryside. Her budget will be about 400,000-500,000, as she has around 300,000 in savings and she is prepared to take on a mortgage of around 100,000, which she would be happy to pay back over around 10 years.

Karen also already owns half a property in Portugal, which she and her ex-husband have recently put up for sale. Half the proceeds of this, which she hopes will be around 120,000, could also go towards funding her move. However, because Karen’s daughters, who both work in social media, don’t yet earn enough to rent a flat in London, they are stuck living at home.

Again this is a common problem for Karen’s generation, and especially for families living in or around London.

It means Karen will stay put until her daughters can afford to move out and be financially independent. She would like to help them financially now, but she is worried about jeopardising her own situation.

When it comes to investing, Karen says her risk appetite used to be “quite high”. But as she approaches the theoretical retirement age, she feels more cautious.

She has thought about using her pension fund, which is currently invested in a Standard Life with-profits fund, to purchase a buy-to-let property. She would like to know if this might be a good idea or not.

She can’t see herself retiring in the near future. As an animal behaviour expert, she loves what she does. However, she is worried about how she would sustain her lifestyle if she were to become too ill to work, or if she was forced by ill health to work less.

Divorcee with 300,000 savings wants to downsize – but her adult children have nowhere else to live

Money makeover with self employed 58 year old

Jonothan McColgan, director at Combined Financial Strategies, said:

Karen is wise to start thinking now about her future and how to meet her objectives. She is hoping to receive an additional 120,000 from the sale of a property in Portugal, which will help fund the purchase of her smaller home. However, any gain on this disposal above the value of 11,100 would be liable to Capital Gains Tax at 28pc as she is a higher-rate taxpayer, so this needs to be taken into consideration.

Something that would make Karen feel more secure is an emergency fund to cover life’s unexpected surprises and to allow her to plan her future with a safety net. I’d recommend she keeps around 30,000 in cash for emergencies.

Karen clearly enjoys her career and does not see herself ever retiring. However, she may want more flexibility in the future to only work when she wants to.

If Karen gets a 10-year mortgage aged 60, she will be debt-free by 70. By this time she will also be in receipt of her state pension, which could be 7,500 a year.

If she wanted to retire at age 70 on an average UK salary of 27,000, she would need to raise around 20,000 gross from her current pensions, on top of her state pension.

The average life expectancy for a woman in the UK is currently 88 years, so she would certainly want her retirement income to last longer than 18 years, or she might be forced to downsize her home again.

My projections show that Karen would need to produce more than 4pc a year from her 200,000 portfolio, which would require her to take at least a moderate level of risk if she is to stand any chance of her pension pot providing 20,000 a year from age 70, and lasting until she is 88 years old.

These are just projections and growth levels are unpredictable.

Most of her investments are in a Standard Life with-profits bond. Looking at the performance records of these funds, it is unlikely that this fund will provide Karen with the returns she needs to give her an average salary in retirement.

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Money makeover with Jonothan McColgan of CFS

Most of Standard Life’s with-profit bonds give an annual bonus of 0pc-3pc a year. However, before switching out, it is important to ask them which one she is in, find out the current bonus rate, and ask whether it is guaranteed.

If the bonus is very low then she may want to transfer to a different investment strategy.

Karen may get a nice surprise and lock in a variable terminal bonus on transferring out of the fund, meaning that her Standard Life pension is actually bigger than she thought.

However, she should be careful that an exit penalty (sometimes called a “market value adjuster”) is not applied, as this could sting her.

If she wishes to keep the pension with Standard Life, she might want to consider the Standard Life “MyFolio funds” as they are risk-rated (so manage the risk internally) and they are competitively priced. However, she will need to check that they are available under her pension contract.