How we helped John and Michelle
* Top 1% of UK households - Source: Institute of Fiscal Studies
John and Michelle came to us for help reducing their school fees. To do this we discussed thoroughly, their financial situation, current and future needs including school fees and other life goals (retirement etc).
Looking at their needs as a continuous journey (because that's life) - we created a plan that covered school fees needs and which also achieved their other goals.
Problem and Implications
We never tell people how to spend their own money however we do try to highlight when incumbent spending patterns may be hindering other longer term goals.
Once clients understand the ramifications of their lifestyle spending it really is up to them what they do next. Most decide to make changes, which helps with school fees and other financial goals.
You should aim to retire with assets of 20 - 25 times your annual expenditure (excluding your home). John and Michelle were not on course to build sufficient assets for later life. Their commitment to private education coupled with their lifestyle spending was standing in the way of later life goals.
To achieve all their goals something would have to change. They needed less debt and a better investment return!
In order to maintain a £180,000 lifestyle in retirement, John and Michelle needed assets of £4,000,000 approximately.
A prime London BTL portfolio worth £2,400,000 today should double in value over 15 years*.
* assumes 5% annual growth
John and Michelle had three specific problems with their property portfolio:
A 2% yield on the BTL portfolio is unlikely to generate sufficient income for John and Michelle's needs (mortgage repayment and retirement lifestyle).
The only feasible way to repay the mortgages would be to sell the properties however this would generate a significant tax charge. Assuming a sale value of £5,000,000 the CGT would be in the region of £1,000,000.
After settling the mortgages and CGT the remainder, £2,700,000, would be far less than the required £4,000,000 needed to generate a sustainable retirement income.
Private School Fees were an added burden however having children settled in private school, John and Michelle, like most parents had an emotive commitment to continue with Private Education.
Removing their children from private school was not an option.
A nudge towards a more sustainable future
A cash-flow forecast projects your financial future based on known events and cash-flows today.
For John and Michelle this was hugely valuable in demonstrating the positive impact any changes we discussed could have on their future.
Buy to Let Portfolio
Calculating the various permutations, we discussed several options for the BTL portfolio including reducing the number of BTL properties they own.
They accepted they were overweight in property and that they would benefit from increased liquidity and lower overall mortgage debt, all facilitated by a property sale.
Whilst a disposal would give rise to CGT, the improved loan to value of their remaining properties could help with their other goals.
With less debt to service and increased cash reserves (from the property sale) the school fees payments were much more sustainable.
The easiest way for John and Michelle to manage in retirement was to have a look at their current expenditure. Reducing their lifestyles would mean they needed a lower level of assets to sustain their requirements.
We were trying to avoid this action where possible so we calculated how the improved liquidity and debt payments could be used to build their asset base tax efficiently.
Pensions are a primary way to build later life wealth. John and Michelle both had pension assets and were both higher rate tax payers meaning pension contributions would generate higher rate tax relief.
John's high income level meant he had limited options to make further pension contributions however they were a very attractive option for Michelle who would receive 40% tax relief on her contributions.
John and Michelle had given very little consideration to their IHT position and their net assets are likely to change dramatically over time.
By realising liquid assets from their property portfolio, we could show John and Michelle various ways to reduce the problem.
As an example, this included insurance, pensions and other tax efficient investments. It also included other ideas around direct tax planning strategies.
In producing an affordable and sustainable School Fees Plan for John and Michelle, we also produced the following benefits: