This financial plan was created to help Stephen, 47, and Daisy Hill, 36, achieve their goals, secure their family, plan for retirement, invest their capital, and reduce their taxes. Stephen works full time and earns £118,000, while Daisy is a self-employed hairdresser and earns him £24,500. They have a 4-year-old daughter, Stella. Their total household income is £149,752 and expenditure is £89,425, giving them an annual surplus of £60,327.
Stephen and Daisy's combined net worth is approximately £710,200, including home assets, investment properties, cars, bank accounts and Stephen's pension. Her debts consist of mortgages, loans and credit card balances, totalling £193,300.
The objective is to ensure that appropriate insurance policies are in place to protect the family, increase pension contributions and save for Stella's future and that university fees and investments are covered by Stephen's estate. Generate profits through efficient sales of Recommendations including investing in stocks and shares ISAs, increasing pension contributions, saving in a lifetime ISA and taking out additional protection insurance.
This report analyses the current financial situation, makes tailored recommendations and provides relevant calculations in the appendix. By implementing the recommended actions, Stephen and Daisy will be in a strong position to ensure their family's future security while making the most of their current resources. Reviewing the plan annually will ensure that it continues to adapt to changing needs.
Assumptions
Certain assumptions were made in order to recommend this financial plan.
It is assumed that:
Stephen and Daisy's income will remain stable at their intended levels (£118,000 and £24,500 respectively)
Expenses are likely to change dramatically in the near future
Stella will need to pay around £12,000 a year to attend university.
Investment property sold for an estimated value of £225,000.
Savings interest rate stays around 1%.2%.
Inflation will remain low at 1-2% per year for the next five years
Tax rules relating to pensions, ISAs, CGT etc.will remain unchanged
This recommendation takes into account Stephen and Daisy’s current financial situation and, continues extensively as described. If there are any significant changes, such as a significant increase or decrease in income or net worth, a large inheritance, or a change in tax laws, it will need to reconsider the plan. It is recommended reevaluating the plan annually to ensure it adapts to changing needs.
Needs and Objectives
Based on the information provided, Stephen and Daisy's main needs and Objectives are:
Family Safety: Adequate life and health insurance to protect the family in the event of death or disability. This is their top priority.
Retirement Planning: Stephen wants long-term growth to generate additional retirement income. Daisy has to apply for a pension.
Investment Plan: They would like to invest the proceeds from the sale of real estate in stocks to achieve growth. Daisy also wants to invest some of her heritage while keeping it accessible.
Education Expenses: Needs to save up for her daughter's college tuition.
Budgeting: Handling annual surplus/deficit.
Real estate sale and inheritance tax reduction.
Ensure that appropriate protective products are properly fitted.
Stephen and Daisy's top priority is to take appropriate precautions to protect and care for their family. In particular, they want to ensure that Daisy and her daughter Stella have sufficient life and health insurance to support them financially in the event of death or illness (Sebayang, et al. 2022). This shows that they value their family's safety above all else.
Looking to the future, her retirement planning has become a top priority for Daisy, especially since she does not have a pension plan. Stephen wants to continue increasing her pension to increase her retirement income, but Daisy needs to start saving into her pension immediately to fund her retirement. The investment plan is also closely related to retirement planning, as they want to invest the funds from Stephen's real estate sale in stocks to achieve growth.
Additionally, Daisy is interested in investing a portion of her inheritance and keeping the rest readily available as an emergency fund (Hajam, 2020). About Stella's future education: Stephen and Daisy have already wisely saved into a lifetime ISA to benefit from a government bonus. This can cover all or part of her college costs over about 15 years. Effectively managing a healthy annual profit and balancing saving and spending requires ongoing budgeting.
Finally, tax planning plays a role in that goal in terms of reducing both capital gains and inheritance taxes. This demonstrates financial awareness and a desire to efficiently manage taxes when selling real estate and ultimately real estate.
Estate Planning and Catastrophic Scenarios
It is important that Stephen and Daisy have a solid estate plan in place for each other and for Stella in the event that they pass away. Although Stephen receives a large death benefit from his employer, both wills must be drawn up in accordance with professional legal advice. This ensures that their assets are tax-efficiently passed through first to each other and then to Stella.
Life insurance is recommended as a supplement for Daisy. It should also consider establishing a trust fund to hold your assets, especially to protect the proceeds from Daisy's inheritance. Trusts can reduce the burden of inheritance tax. In the worst case scenario, the catastrophic scenario is that both of them die while Stella is young.
Figure 1: Catastrophic Scenario
Appointing her guardian in the estate will ensure that they know who will take care of her upbringing. The trust could hold assets to fund Stella's needs until she reaches adulthood. The above graph visually present this catastrophic scenario if they both will died before Stella will become and adult. No one likes to think about the worst-case scenario, but careful emergency planning can prevent unnecessary financial trouble for your loved one. Stephen and Daisy’s financial health allows them to make arrangements to meet their family's needs should the unexpected occur. Consulting with an attorney who specializes in wills, trusts, and estate planning can help develop a plan tailored to the situation.
Current Position
Net Worth
The following table shows the estimated net worth of Stephen and Daisy:
Figure 2: Net worth Calculation
The above figure shows the calculations of the Hill family's Net worth or Net Assets. The total assets of Stephen and Daisy are £903,500 and their total liabilities are £193,300 (Hani, 2021). Therefore, the amount of the net worth of them is £710,200.
Figure 3: Total Asset Graph
The above pie chart segmented the total assets of Stephen and Daisy (Sun, 2022). It indicates that the main residence and second property Stephen is its main asset.
Figure 4: Total Liabilities Graph
The above chart shows the liabilities of Stephen and Daisy which are required to be paid off by them. It is mainly contained with their Mortgage payment, Loan payment, and Credit card Expenses (Shihan, 2020). It clearly shows that most of their most of liabilities were involved in the mortgage.
The total income of Stephen is £120,254 and Daisy is £29,260 annually (Adiandari, 2023). After deducting their annual; expenditures, the calculated surplus income of them is (£149,752 - £89,425) £60,327.
Figure 6: Income Graph
Figure 5 reflects the incomes of Stephen and Daisy aligning with their joint incomes as well (Hiebert, 2022). It shows that the total income of Stephen is much higher than Daisy's.
Figure 7: Expenses Graph
The above figure demonstrates the total expenditure of the Hill family also with their annual surplus. It shows that the total expenditure bar is higher than their surplus (Sruthi, and Supriya, 2021). So it is clear that their income/expenditure proportion is higher than their surplus.
Taxation
Stephen
Figure 8: Total Tax Calculation of Stephen
The above figure of calculation shows that Stephen's total tax payable is £34,632, and the total NIC payable amount is £8,862.
Figure 9: Total Tax Calculation Graph of Stephen
The Above Charts in Figure 8, visualize the taxable income and the tax payable positions of Stephen to gather critical insights.
Daisy
Daisy is self-employed so will pay Class 2 and 4 NICs
The Annual Class 2 NIC = £3.15 x 52 = £163.80
Figure 10: Total Tax Calculation of Daisy
Figure 9 shows the Taxable income of Daisy is £11,930 and the total class 4 NIC payable is 1,181.60.
Figure 11: Total Tax Calculation Graph of Daisy
The above graph critically explains and differentiates the total taxable income of daisy and also the position of her NIC payable amount with her income.
Pensions
Stephen pays 10% of his £118,000 salary into a defined contribution pension scheme. His employer pays three times his salary as a death benefit (Gunawan, et al. 2021).
Stephen's current pension contributions are his £11,800 from himself and his £354,000 from his employer at the time of his death.
Daisy currently has no retirement savings.
Savings and Investing
There are different options which help Stephen and Daisy with their decision regarding their saving and investing:
Stocks and Shares ISA
By opening a Stocks and Shares ISA, Stephen and Daisy will be able to invest £20,000 each year tax-free across a range of investments including stocks, bonds, funds and ETFs. This flexibility allows us to accommodate different risk appetites. Growth investments such as shares within an ISA benefit from tax-free capital gains and dividend income (Seretna-Sałamaj, and Szpara, 2022). ISAs allow him to generate growth over a medium to long-term period of 10 years or more, making them ideal as a tax-efficient deal for retirement or other long-term goals. Regular contributions are recommended to average costs and smooth out market fluctuations. Stephen and Daisy can develop a diversified portfolio tailored to their risk profiles. Continuous review ensures that their asset allocation evolves appropriately over time.
Lifetime ISA
A Lifetime ISA is ideal for saving money on Stella’s University costs. With a 25% bonus from the government on contributions of up to £4,000 a year, their savings will increase significantly over the long term. As the name suggests, the Lifetime ISA is designed specifically for two of her lifetime milestones: her first home or saving for retirement. For these specific purposes, funds can be withdrawn tax-free from age 60. This makes a Lifetime ISA a suitable tax-efficient vehicle for their education savings needs (Muggleton, et al. 2021). By opening now and contributing annually, Stephen and Daisy can benefit from shared growth and maximize the impact of their government bonuses. As a result, if Stella attends university, most of her planned tuition fees will be effectively secured.
Pension Contributions
By contributing to their pension, Stephen and Daisy can benefit from valuable tax relief of up to £40,000 a year. This allows the state to top up its top marginal tax rate, making pension contributions very tax-efficient. Because their income is in excess, additional contributions are affordable. By contributing to a personal pension and her SIPP, Daisy can build up her retirement savings in a cost-effective way. She needs to take advantage of tax breaks and at the same time earn money to prepare for the future (Morgan, and Long, 2020). For Stephen, continued contributions are also important to keep pension growth above inflation. Merging the pension into his SIPP can give him flexibility in his investments. Pensions are an essential part of achieving the retirement income they desire.
Invest Property Proceeds
Reinvesting the capital gains from the sale of Stephen's property into the ISA will allow these funds to continue to grow tax-efficiently. By transferring a lump sum to an ISA after paying capital gains tax, their investment funds are stored for the long term while being protected from additional capital gains tax. This achieves the goal of investing profits in sustainable growth rather than consuming them (Sabri, et al. 2020). This can significantly increase their ISA funds, giving them greater flexibility and potential returns. A portfolio of stocks and bonds within an ISA can target growth above inflation to maintain the true value of their capital. By gradually withdrawing their ISA after retirement, It can provide an inheritance tax-friendly source of income.
Savings Accounts
Easy-access savings accounts give them the flexibility to access their funds at any time without any restrictions. Although interest rates are low, this account protects their capital and provides instant liquidity. Keeping a portion of Daisy's inheritance in cash allows her to have money set aside for vacations, social gatherings, or other lump sums when they arise. This is an emergency fund, so immediate access outweighs the return (Goyal, and Kumar, 2021). To optimize the interest they earn while maintaining access, They can find Easy Access accounts with higher interest rates. These cash holdings satisfy the need to keep a portion of their inheritance available.
Fixed Rate Savings
Fixed-rate bonds offer higher interest rates in exchange for locking up their money for 1 to 5 years compared to immediate access savings. Depending on the period, they can get returns of around 2-4% per year. Choosing a two- to three-year time horizon represents a mid-point, allowing them to access their funds before retirement if they need to, but with a better return than immediate savings (Schuhen, et al. 2022). This balances Daisy's needs for safety and interest. Since interest rates change frequently, She may want to consider the best fixed-rate bond. It can spread the bulk of its funds across bonds of different maturities to control access while optimizing its overall return on this portion.
Suggestions
Here are the Final Suggestions for their Savings and Investment Plan:
Open a Lifetime ISA and contribute £4,000 each to benefit from a government bonus towards Stella's future university costs.
Use part of Daisy's inheritance to open a stocks and shares ISA for each person and contribute up to £20,000 this tax year. Invest in long-term growth.
Invest the remainder of the property sale proceeds after paying CGT into his ISA.
Daisy should open a private pension scheme and contribute £10,000 a year, including tax relief.
Transfer £50,000 of Daisy’s inheritance to an accessible savings account as accessible funds.
Invests her £80,000 in a 3-year fixed-rate savings bond to get a better interest rate.
Inheritance Tax and Capital Gains Tax
Inheritance Tax
Daisy received an inheritance of £170,000 in cash. This is below his £325,000, which is in the zero rate bracket, so no inheritance tax will be due (Pijoh, et al. 2020).
When Stephen and Daisy die, the entire £710,200 estate will be subject to inheritance tax unless there are further gifts or transfers, as the zero inheritance tax threshold is exceeded.
The Tax Calculation Like:
Figure 12: Inherent Tax Calculation
The inheritance tax on their joint property would be £24,080.
To mitigate this, they should consider the following:
Make gifts from excess income each year
Make gifts of capital up to £3,000 tax-free
Make transfers of assets between each other tax-free and take advantage of both deductions on the second death
Transfer tax-free to a trust
Take out life insurance registered in a trust
Stephen and Daisy recommend that they seek advice from an inheritance tax advisor to legally reduce their inheritance tax.
Capital Gains Tax
Stephen is selling an investment property he bought for £104,500 and spent £42,500 improving (£2,500 commission + £40,000 refurbishment costs).
This property is sold for £225,000 after being in his possession for nine years (based on case study date).
Profit = selling price - (cost + improvement)
= £225,000 - (£104,500 + £42,500)
= £78,000
Stephen has a capital gains tax deduction of £12,300 in 2023/24.
Taxable profit is £78,000 - £12,300 = £65,700.
This is a 28% tax on residential property.
Capital gains tax = his 28% of £65,700 = £18,396
Stephen owes his CGT liability of £18,396 in respect of the sale of the property.
Protection Planning
The following Policies are recommended for their protection planning:
Life Insurance
Life insurance is insurance that pays a lump sum if they die during the policy period. For Stephen, a benefit equal to three times her salary would be enough to cover the family's financial needs in the event of his employer's death. They can use the tax-free lump sum of £354,000 to pay down debt and support Daisy and Stella (Samouak, 2021). Stephen does not currently need additional life insurance because his existing insurance covers his needs adequately. For Daisy, the £150,000 insurance policy will pay off her mortgage and provide for Stella's upbringing in the event Daisy dies prematurely. A 36-year-old non-smoker estimates that the annual premium for this level of insurance is around £120. By creating this policy in the appropriate trust, the proceeds will remain outside of Daisy's estate for estate tax efficiency.
Critical Illness Cover
Critical illness covеr providеs a tax-free lump sum if they are diagnosed with a specific serious illness during the policy period. In the case of Stephen and Daisy, the £100,000 each will help cover illnesses such as cancer, strokes and heart attacks. This lump sum can cover the loss of income during treatment and recovery, as well as pay for any special equipment, modifications, or treatments needed (Saranza, et al. 2022). Typical bonuses are £300 a year for Stephen, 47, and £240 a year for Daisy, 36, depending on health. Insurance typically pays not only for the initial diagnosis but also for subsequent critical periods, increasing the value of this coverage. The proceeds will help them maintain their lifestyle while focusing on their recovery.
Income Protection
Income protection insurance is insurance that compensates a portion of the income if they are unable to work due to illness or injury. For Daisy, who is self-employed, this protection could be invaluable if she is unable to work for an extended period. After a four-week waiting period until retirement age, a policy that would cover 75% of their £24,500 (£18,375 a year) income would provide financial security (Ambuli, 2022). This estimate assumes that a 36-year-old non-smoker will have an annual premium of around £1,200. Stephen already receives sick pay from his employer as a safety net. Income security protection will give Daisy the income security she needs in her self-employed situation
Private Medical Insurance
Private health insurance companies fund private medical treatment, allowing faster diagnosis and access to specialists. For Stephen, Daisy and Stella, family insurance could cost more than £3,500 a year. Although it is expensive, it can prevent long waits on the NHS if they have a medical problem (Lim, et al. 2020). Some employers offer this as a benefit, and Stephen might consider it. If Stephen's job provides compensation, he can compare the amount of compensation and decide whether to take it on or pay it personally. The NHS provides comprehensive free healthcare, so PMI is an optional add-on that provides convenience beyond essential financial protection. Its value will depend on how they view the NHS compared to private care.
Conclusions and Recommendations
Recommendations
The main recommendations of this financial plan are:
Increase in pension contributions. Stephen currently contributes 10% and has in-service death benefit insurance. Daisy should set up a personal pension and contribute £10,000 a year, including tax relief.
Get protection insurance - Daisy's life insurance, both critical illness insurance, and Daisy's income protection.
Open a Lifetime ISA and contribute £4,000 each to benefit from a government bonus and save on Stella's university costs.
Use Daisy's inheritance to invest £20,000 in ISA shares this tax year.
After paying CGT, invest the remainder of the property sale proceeds in his ISA.
Places his £50,000 of Daisy's inheritance in an easily accessible savings account and £80,000 in his three-year fixed-rate bond.
Get expert advice on inheritance tax planning.
Review the spending and create a budget to effectively manage their annual surplus of £60,327.
Conclusion
By implementing these recommendations, Stephen and Daisy will be able to achieve their important goals of providing security for their family, saving for the future, and investing their capital in a tax-efficient manner. Their finances are currently in a sufficient position to meet their future needs and aspirations. Reviewing their situation every year and adapting to any changes will help them build this strong foundation.
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References
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