Financial Plan for Richard and Stephanie

Posted: August 26th, 2021

Student’s Name

Instructor’s Name

Course

Date

Portfolio Management Assignment

Financial Plan for Richard and Stephanie

Question 1

Table 1: Financial Plan

Richard and Stephanie Financial Plan
	Short-term	Medium-term	Long-term
	£	£	£
Richard
pension scheme			59220
pension scheme total amount			550000
Annual salary	28500
pension scheme			6130
			18390
Inheritance from grandfather	17000
Wind-fall gain	25
Stephanie
Annual salary	50100
pension scheme contribution	5260.5
pension scheme
Sun Life Financial fund amount			74800
Annual annuity from Sun Life Financial			2300
Capital gain
Painting		140600
		19000
Couple
Joint mortgage repayment	11400	10600
Car loan	2460	9040
Credit card	7700
Annual holiday	8000
Annual income	51720
Annual expenditure
Utilities	2160
Food	7200
Petrol expenses	5160
Insurance costs	600
Social expenditure	7200
Council taxes	1740
Season tickets	600
Miscellaneous for credit cards	4800
Holidays expenses	8400

Presumptions

The short-term period is 0 to one year, Medium-term is less than five years, and the long-term period is more than five years.

Tax treatment

1. Richard’s gift from his grandfather of £17000 is tax-exempt. The tax exempted amount will be £3000 per annum times seven years (£3000 X 7= £21000)
2. Richard’s windfall gain of £25 is tax exempted.
3. The capital gain from Stephanie’s flat is taxed at 28%, which is the final tax. (£210000-£62000) x 28%)
4. The taxable amount on the painting will be £16000 (£19000-£3000).
5. Amounts receivable on pension funds receive three times taxes free compulsory on lump-sum amounts.

Figure 1: Monthly Income and Expenditure Distribution

Question 2

The 2014/15 UK pension reforms state that people who save on the pension schemes and are over fifty-five years of age will have the option of receiving smaller lump sums from April 2015(GOV.UK, 1). The reforms further state that the savers will have the freedom to take 25% of the pension savings that will be tax-free (GOV.UK, 1).  The pension reforms would apply to both savers on money purchase or defined-contribution and also defined-benefit schemes. Equally, employers primarily fund defined-benefit plans. These plans offer eligible employees a guaranteed source of income infinitely when they retire. The employers are assured a particular retirement benefit amounts for every participant to the scheme, based on factors like several years on service and employees’ salary. Thus, employees have minute control over the pension funds until they receive the amounts upon their retirement (Ilmanen, et al. 3). The contributing company takes full responsibility for pension funds’ investments and their distribution to the retirees. Therefore, the employers bear the entire risk of the returns of the investment funds. Thus, the administrative costs under this scheme are high due to the risk and complexity of the operations of actuarial projections.

            In contrast, the defined-contribution schemes are funded by the employees, though employers make an equivalent contribution based on each employee’s contribution. Therefore under this scheme, the participants elect a certain proportion of the gross salary through payroll deduction to the pension plan, and the employers make an equivalent contribution (Ali et al., 223). Further, the administrative costs of running the schemes are cheaper, and it is less risky as the employers do not have an obligation towards the performance of the investments after the pension funds are made. The employee has sole responsibility for making the pension contributions and also choosing the investments on the plan (Ali et al., 223). Under this scheme, the contributions are invested in selected mutual funds, money markets, annuities, and market stocks. Hence, the investments in the pension plan are tax-deferred till the pension funds are withdrawn upon the retirement age. 

            According to the 2014/15 UK pension reforms, Richard and Stephanie can continue working up to the retirement age but still receive 25% of their pension savings (GOV.UK, 1). They do not have to wait until they are sixty years to start enjoying their retirement benefits. More so, it is recommended that Richard transfer his salary scheme to a defined contribution plan from a defined-benefit scheme. In the defined contribution scheme, he will be budgeting for retirement benefits more forcefully as he will be the one contributing the amounts, and the employer will just be topping up his contributions (Ali et al., 223). Defined-contribution schemes also have better pay in case of economic downturns where employers may be unwilling to commit to defined- contribution plans. Finally, Richard can transfer his pension benefits from one employment to another under the defined-contribution, thus, the compounded interest rate is deferred for taxation.

Question 3

Capital gains tax refers to the tax on the profit realized or financial gain when disposing an asset that has depreciated. It is the tax on the gain made when selling an asset, gifting out, swapping an asset for another one, or compensation for an asset. The total gain is the difference between the sale value and the original purchase value (Black, 184). The tax on the financial gain realized by Richard and Stephanie will be charged at 28% as they are U.K. residents. Therefore, the total taxable gains realized from the sale of Stephanie’s flat is above the primary income tax rate group. The tax calculation on the capital gain from Stephanie’s flat is provided as follows in Table 2 below;

Table 2: Capital Gain

Details	Amount (£)
Selling cost	210000
Initial cost	62000
Financial gain	48000
Capital gains tax @ 28%	41440

Source: Capital gain (Classwork, 4)

            Inheritance tax refers to the tax on an estate whose owner has died, gifts, and trusts made during the deceased person’s lifetime. The tax is remitted by the executor of the deceased person using the funds on estate or gifts received on the deceased (Redonda, 1). The inheritance standard tax rate for U.K. residents is 40%, which is only charged on the amount that is above the threshold (GOV.UK, 1). The threshold amount in the U.K. is £325,000, and any amount above this is taxable as inheritance tax when a person dies (GOV.UK, 1). The threshold amount was increased to £650,000 in the year 2007, for civil partners and married couples, but provided the executor transfers the first partner’s unemployed inheritance tax threshold amount to the remaining spouse when they die (GOV.UK, 1). For a gift, the first £3,000 is tax exempted per annum. This is carried forward, provided the gift-giver does not bestow amount more than £3,000 per annum. For instance, if one receives a gift of £3,000 by the year 2019, the tax relief amount in the year 2021 will be £9,000. This is an aggregate of three years of tax relief. Thus, the gifts received by Richard and Stephanie will be treated as follows for the tax purposes;

1. Richard’s gift from his late grandfather of £17,000 is tax-exempt. The tax exempted amount is £3,000 per annum multiplied by seven years (£3000 X 7= £21000)
2. The taxable amount on Stephanie’s painting will be £16,000 (£19000-£3000)

            Estate planning enables a person to put down a plan with details of how one wishes his estate to be managed upon death. It ensures that the person executing the estate will work according to one’s desires, fulfill the deceased wishes, and arrange his affairs accordingly (Redonda, 1). Through estate planning, one is in a position to reduce the inheritance tax amounts the trustees will pay.  When an individual is performing estate planning, he can get the required assistance from the U.K. Care Guide, which offers guidance on how a person can structure his estate to ensure the minimum inheritance tax amount will be payable. In the case of Richard and Stephanie, they can adopt estate planning as they desire to leave an equal amount of their inheritance to Olivia and Emily. They should not assume that their inheritance will be under Olivia and Emily automatically, as, without a will, this will not happen. Therefore the couple should have a written will and not die intestate to transfer assets to their heirs and also create the least tax burden on them.

In the case of ill-health, there are many types of care plans in the U.K. that one can adopt across health care. The primary purpose of care planning is to safeguard the patient and ensure he receives top-notch care regardless of the staff on duty. It also provides an accurate recording of the client’s details and support the patient in treatment or managing his issues. Richard and Stephanie should do care planning by visiting a healthcare practitioner to talk about the impact of ill-health in their lives (Means, 1). They will also have a conversation on how best they can be supported to meet their wellbeing and health needs during their lifetime.  It will ensure that when they fall sick, they will not be a burden to anyone or the society. In this case, someone will take care of them. The high care costs can reduce the couple’s savings and inheritance to Olivia and Emily. Thus, it is advisable to have a capping cost when conducting their care planning.

Question 4

The investment options available to Richard and Stephanie depend on their risk appetite. Stephanie is willing to take some risks though she does not want daily management of the portfolio as she is busy. Likewise, Richard is naturally risk-averse though he is still ready to make some financial risk. The couple should invest in low to medium risk portfolio as they are risk-averse.

Risk aversion refers to the human behavior that,when at risk, one attempts to lower the uncertainty. It is the hesitation of an investor to agree to an underlying situation that has an unknown payoff rather than another investment option with more predictable payoffs but with a lower expected payoff (Chari et al., 378). Risk-averse investors generally invest in low risk. The low returns projects as they prefer low return investments that offer certain risks, instead of higher-return investments with uncertain risks (Chari et al., 356). The risk-averse investor’s objectives are to reduce the risk levels on a particular investment for a given return.  Richard and Stephanie’s investment options should include low risk and risk- free investment such as government securities, mutual funds, multifamily apartment syndications, note investing, and corporate bonds.

Further, the couple should adopt different portfolios to maximize the returns and reduce the risk. Government securities are either treasury bills that are short-term in nature or treasury bonds, which are long-term financial instruments (Chari et al., 370). They are risk-free investments that offer steady returns and are bonds issued by the U.K government. They are the best investment option for Stephanie as they require minimal supervision (Chari et al., 370). The government securities offer a rate of return of 5-6%. Corporate bonds are also a good investment option for the couple as they provide constant returns and are stable. For example, the corporate bond offered by Barclays bank guaranteed an 8% return in investment.

Table 3: Investment Plan

Richard and StephanieInvestment plan
Details	Cash inflows	Cash outflows
	£	£
Richard
Annual salary	28500
Inheritance from grandfather	17000
Wind-fall gain	25
Stephanie
Annual salary	50100
pension scheme contribution		5260.5
Painting	140600
	19000
Couple
Joint mortgage repayment		10600
Car loan		9040
Credit card		7700
Annual holiday		8000
	255225	40600.5
Investment amount	214624.5
Government bonds	150237.15	70%
Corporate bonds	64387.35	30%

Source: Investment plan (Classwork, 7)

The couple is aged and almost retiring and do not have much time to recover before retirement. Thus, the above investment options would be the best option for them as risk and investment returns have a direct relationship.

Question 5

Olivia is saving for a deposit to move out and buy a property locally through a mortgage. She has a savings of £5,000, and her yearly gross salary is £25,000. There are different types of mortgage available in the U.K that Olivia can take. The major types are variable-rate, tracker, discount, and standard-variable mortgage (Kelly, et al., 1). The tracker mortgages’ interest rate sets the interest rate according to the Bank of England’s basic rate, which is currently 0.1% (GOV.UK, 1).  Under this type, a tracker is set when entering the deal period, such as three years. After the elapse of this tracker period, the lender’s variable rates apply on the mortgage, though few types have tracker indefinitely. Hence, the tracker mortgages are relatively cheaper than the rest due to the base rate on the Bank of England. Equally, when the base rate is down, the mortgage is affordable.

            Contrarily, on discount mortgages, the borrowers pay the standard variable rate, which is usually a fixed rate over the loan repayment period. It is essential to look for adjustment features before taking a mortgage. In the fixed-rate mortgages, a borrower pays a constant interest rate for the whole loan period regardless of market fluctuations and volatility (Kelly et al., 1). The fixed period usually runs for two to five years. In this way, the loan is moved onto the lender’s variable rate for the remaining period. The standard variable rate for banks is currently 5% though it is bound to change per the lender’s discretion.

            As such, Olivia should take a fixed-rate mortgage. She is on a tight budget with an annual salary of £25,000 and savings of only £5,000.  More so, the interest rates will not increase when servicing the loan regardless of the market variations. Thus, she will be sure of the repayment period and will budget effectively for her financial needs (Kelly et al., 1). However, Olivia should also consider other costs of purchasing a property, such as stamp duty, agency fees, housing specific taxes, notary fees, and condominium fees. Below are Olivia’s net pay and monthly budget for the first year,

Table 4: Olivia’s Monthly Budget

Details	Amount (£)
Annual gross salary	25000
less: tax @20%	5000
Annual net income	20000
less: Fixed mortgage @5%	1000
Net income after tax	19000
Monthly budget	1583.333

Source: Olivia’s Monthly budget (Classwork, 7)

Works Cited

Ali, Susannah Bruns, and Howard A. Frank. “Retirement planning decisions: Choices between defined benefit and defined contribution plans.” The American Review of          Public. Administration 49.2 (2019): 218-235.

Black, Celeste. “The Attribution of Profits to Permanent Establishments: Testing the Interaction of Domestic Taxation Laws and Tax Treaties in Practice.” British Tax Review 2017.2 (2017): 172-203.

Chari, Murali D.R., et al. “Bowman’s risk-return paradox: An agency theory perspective.” Journal of Business Research 95 (2019): 357-375.

Classwork. Personal Finance and Wealth Planning – Component 2 🙁 n.d) 1-10.                 

Ilmanen, Antti, et al. “Practical Applications of Defined Contribution Retirement Plans Should Look and Feel More like Defined Benefit Plans.” Practical Applications   5.2 (2017): 1-  5.

GOV.UK. “Income Tax.” GOV. U.K., 2020, https://www.gov.uk/income-tax.

Kelly, Jane, and Samantha Myers. Fixed-rate mortgages: building resilience or generating risk?. No. 5/FS/19. Central Bank of Ireland, 2019.

Means, Robin. “Involving Older People in Community Care Planning: Emerging Issues from the U.K. Reform of Community Care.” (2020).

Redonda, Agustin. Inheritance Taxation, Corporate Succession, and Sustainability. No. 1701. Council on Economic Policies, 2017.