A delve through the main stream media, (MSM), gives lots of examples where big lottery winners lose it all and file for bankruptcy within 10 years, (an example here from the Express). The lottery operator, as part of the aftercare for lottery winners, makes an introduction to one of a number of national providers of financial advice, so a regional provider, like ourselves will not normally meet lottery winners, except by personal introduction long after the event. In the last 10 years, I have met two, both were introduced to me though a charity I volunteer with and both were trying to understand the finer details of the advice they had been given.
As this is not my usual business, this is a mixture of a thought experiment and hypothetical case study, to explore how I would advise someone who had suddenly received around a £1Million.
So, imagine a couple in their 30’s, with children of school age, a few credit card debts, a £150,000 mortgage and jobs they enjoy, but do not have a strong emotional commitment to. They want to make the best of the money, ideally passing some to their children, but would really like to retire early.
Setting the scene, £1Million is not really a great of money; for a couple, both aged 35 and likely to live to 85 year old, it is only an extra £10,000 each per year, ignoring any investment returns. This means that packing jobs in and going around the world for a few years is likely to burn it all up very quickly.
The best tax breaks for people in the UK are pensions, ISAs, the principal private residence concession for capital gains tax and the capital taxes personal allowance, so the advice is to make use of all these concessions, wherever possible.
The Methodology;
Pay off debt; clear the credit card debt. This will be expensive debt to service and would otherwise be a permanent drain on annual income until it is cleared. Budget carefully, so new debt is not accumulated; for essential items, try to pay cash and ask for a discount. For potential impulse purchases, take a rain check for a month, as see if you can still justify it to a sceptical partner; just buying “stuff” is a regular downfall.
Clear the mortgage; you would otherwise be paying off the mortgage with income you have paid tax on; winnings are tax free, but tax is due on interest on the winnings. If you are into property improvement, there is some capital gain to be made by buying the worst house in the best area and improving it. There is no capital gains tax on your main residence, which is why trading up and home improvements are UK national pastimes.
An Emergency Fund; put aside 6-12 months net income in a deposit account with the highest rate you can find as an emergency fund. Under most circumstances, you should stay within your budget, but when things go wrong, say, the car or the washing machine break down, use some of this money to meet immediate need rather than selling investments.
Use a financial adviser; stick to absolutely conventional investments covered by the Financial Services Compensation Scheme, (FSCS), and ignore all “get rich quick schemes”.
Maximise your pension contributions; the best way to retire early is to pay as much as you can into your pension, as soon as possible. With Pension Freedoms, pension money you do not spend before death can be passed between spouses or down the family. There is a cap to the amount of money you can put into a pension in one year, but using unused allowances from 3 previous years and the current year for both working partners, will give pension funds a significant boost. Regularly pay in as much as you can afford to your pensions in future years.
Maximise your ISA contributions; the couple should make their maximum ISA contributions for the current year and each subsequent year. The allowance in 2017/18 is £20,000 each. Once in an ISA, there is no income tax or capital gains tax to pay. Regularly pay in as much as you can afford to your ISAs in future years.
Maximise your Junior ISA contributions; each child can have £4,128 invested in cash or stocks and shares in the tax year 2017/18. Two issues you need to be aware of; the account becomes manageable by the child at 16 years old, and can be withdrawn and spent at 18 years old. Pay in what seems prudent in future years to the JISAs, as your children may spend their money on something you do not approve of!
Open a general investment account for each partner; invest whatever is left in stocks and shares spread evenly between the couple, to take advantage of the individual personal capital allowances. Use these investments to top up the pension and ISA premiums each year.
All of the investments should generate a surplus every year, so a modest amount could be splurged on a better holiday or decorating the house, but never spend capital on depreciating assets and keep an eye on the bills coming in. As the key objective is to retire early, burying as much money as possible in tax advantaged savings schemes is key; a different objective would lead to a different recommendation.
There is an old joke that suggests that you need at least £5Million to live like a millionaire, but I would suggest that inflation has even got to that. A £1Million investment pot should give you about £50,000 per year before tax, or around £36,000 per year after tax, (depending on how it is held), so helicopters and castles in Spain would still be out of reach!
If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.