Net Worth and Balance

[TAllen]

The budget has prompted me to take stock of my financial position and think about the future. I am 45, my wife 42, and we have two teenage children who will be heading off to University in the next 5 years. I have my own small business and enjoy working so have no immediate plans for any early retirement, although we don't know what the future holds. My wife has a part-time salaried public sector income of £20k that I top up with dividends to £50k. Rather than FIRE or Investments, I just want to ask about the balance of my assets and where we should expect to be at this age and stage of life.


Cash Accounts £55,000 5%
Pensions (SIPP) £220,000 21%
Pensions (DB) £150,000 14%
Property £500,000 47%
Investments £118,000 11%
Other Assets £30,000 3%
Total £1,073,000

Mortgage -£119,000

Net Worth (inc pensions) £954,000

Annual income £100k (combined pre-tax income)
Annual expenditure approx £28k (includes £680pm 2% mortgage)
Annual savings after-tax >£40k (at a guess)

Notes

• Income is a mixture of salary and dividends to stay below the higher-rate threshold.
• Surplus business profits go into SIPP or kept as retained capital.
• Our 5-year mortgage deal ends in two years at which point we could pay-down the balance.
• We lead basic lifestyles with low overheads but do prioritise family experiences like holidays while the kids are still at home.
• No other borrowings or liabilities other than monthly cashback credit cards paid off in full.
• The SIPP and investments are in a portfolio of vanguard life strategy style trusts.
• The DB pension figure is based on recent transfer value requests.
• Cash and investments are sheltered in ISAs
• We should break the £1m NW figure at some point this year all being well.

Does this look like a reasonable balance of assets for this stage in our lives?

[Shelford]

In brief, you appear to be doing all the right things, maximising tax allowances and thinking ahead. A few thoughts:

-two kids through university = £100K, if you are paying for tuition and accommodation. We took the decision to do this, as I wanted our children to exit into the world of work without a looming debt. If so, this is something you'll need to budget for.

-I assume your 'other investments' are in an ISA. If not, you should be moving £40K (being you/your wife's combined allowance) per year into this.

-It is surprisingly easy to exceed the lifetime allowance on pensions of £1.072m. If (say) you don't take this till age 60, but continue to pay in at your current rate, you may well find yourself knocking on this limit. Take a look at Monevator if this is all greek to you. The answer is to ensure you spread pension payments across you and your wife, and use your ISA allowances.

-you don't provide much info on asset allocation within your investment vehicles. Again, you appear to be going down a v sensible low cost tracker route, and Monevator provides lots of help here. Asset allocation is very important.

Shelford

[Dod101]

All these numbers look good to me. I remember when I was working at about the same age and I suppose I was in much the same situation as regards financial security. My wife was not working so it was down to me. I was given early retirement at the age of 53 and 25 years later I am still here, not poor and having given quite a lot of money to my kids in the meantime.

As long as you have money coming in to the joint enterprise (which is how I looked at the family situation) you are doing well, and presumably are able to reinvest dividends in the ISA and the SIPP, pushing any spare cash into the ISA (rather than the SIPP, although I appreciate that you get tax relief with the SIPP) Give yourself another say 10 years and you can comfortably retire. Broad brush but it need not be any more than that. You do not need spreadsheets (although we all use them)

Dod

[TUK020]

Looks like you are on the right track.

Things you might want to think about:
- life & disability insurance? what happens if something stops you earning?
- wife's pension?
- paying for kids through uni. Can they become employees of your company?
- long term support for kids to get a flat deposit - start S&S Junior ISAs?

[xxd09]

Aged 74 retd 17 years-small businessman so walked the walk
Remove your house from your savings pot-it’s mainly there to keep you out of the rain and a roof over you and your families head till you die
In an emergency a home equity plan or a reverse mortgage can be used but expensive and financially inefficient
£100000 of a 60/40 stock/bond portfolio produces £3000 pa of income
Sums required to fund a sustainable pension income are large
Live frugally and keep saving-you are on the right track
xxd09

[airbus330]

I did a similar calc at the same age 20 years ago. I had similar numbers to you backward adjusted and the end game has turned out well. I'm also impressed with your low spending, particularly with teenagers in the house.
Couple of points. I was very lucky to have had super generous death-in-service benefits from my occupational DC pension so I was always happy that the family would carry on financially on my unexpected demise. A provision for that eventuality should be made.
I also had great pay and benefits, had planned my retirement at 62, but a Black Swan event took all that away and left me incomeless at 60 with no prospect of working again. Whilst it was a shock, I was at least close enough to my exit age to have enough to be able retire. Had this event happened at 50-55, it would have been a much worse place to be. Can't use the pension money and maybe too old to learn a new trade. I did sort of plan for this and made sure that I had a few years income in reserve from the age of 50 to get me over the pension access age.

I vastly underestimated the expense of having 2 children at University at the same time, particularly if they choose expensive places to go, and I should have started funding that earlier. Also, although one hopes that children will be financially independent by their mid-20's, so often they are not. The boomerang generation can be a bit of a financial drag just as you are approaching retirement.

All the best.

[TAllen]

Thank you for your very helpful and reassuring replies. To follow-up on a few points:

-two kids through university = £100K, if you are paying for tuition and accommodation. We took the decision to do this, as I wanted our children to exit into the world of work without a looming debt. If so, this is something you'll need to budget for.

That is on my mind and in part a motivation for asking the question here. The kids also have about £20k each in JISAs but mostly we have kept the funds under our control. Any inheritance from grandparents will eventually pass directly to the kids which should help them get on the housing ladder.

-I assume your 'other investments' are in an ISA. If not, you should be moving £40K (being you/your wife's combined allowance) per year into this.

Yes. We try to fill our ISAs each year.

-It is surprisingly easy to exceed the lifetime allowance on pensions of £1.072m. If (say) you don't take this till age 60, but continue to pay in at your current rate, you may well find yourself knocking on this limit. Take a look at Monevator if this is all greek to you. The answer is to ensure you spread pension payments across you and your wife, and use your ISA allowances.

At present that would feel like a nice problem to have, but we will see what the future has in store. This exercise is making me realise that I need to do some modelling on potential growth to that end.

-you don't provide much info on asset allocation within your investment vehicles. Again, you appear to be going down a v sensible low cost tracker route, and Monevator provides lots of help here. Asset allocation is very important.

I do read Monevator and used them to select Interactive Investor. I have experimented with different portfolios but low-cost trackers appear to perform more reliably than my active selections.

All these numbers look good to me. I remember when I was working at about the same age and I suppose I was in much the same situation as regards financial security. My wife was not working so it was down to me. I was given early retirement at the age of 53 and 25 years later I am still here, not poor and having given quite a lot of money to my kids in the meantime.

Hearing that experience is reassuring. I suspect that compared to much of the population our position isn't too bad, but the figures required for retirement can be scary.

As long as you have money coming in to the joint enterprise (which is how I looked at the family situation) you are doing well, and presumably are able to reinvest dividends in the ISA and the SIPP, pushing any spare cash into the ISA (rather than the SIPP, although I appreciate that you get tax relief with the SIPP) Give yourself another say 10 years and you can comfortably retire. Broad brush but it need not be any more than that. You do not need spreadsheets (although we all use them)

The balance between tax relief on SIPP versus the flexibility and liquidity of ISAs has been tricky. My approach has to keep us both lower rate taxpayers which easily gives enough to fund our ISAs. Business profit that exceeds our tax threshold has gone directly into the SIPP (paid by the business) or as retained capital. I expect that my business can continue to generate similar (or greater) income for the next decade, but who knows.

Things you might want to think about:
- life & disability insurance? what happens if something stops you earning?

If I recall correctly, we have £400k life cover for me and £250k on my wife (individual policies written in trust). I also have policy through my business that combines critical illness and income protection with another £150k of life cover.

- wife's pension?

Aside from qualifying for full state pension, she does have more in a public sector scheme although I do need to chase the figures. She had intermittent time out for education and maternity/childcare so the amounts aren't huge. But you make a good point that we can redirect more into a SIPP in her name.

- paying for kids through uni. Can they become employees of your company?

Funnily enough I recently looked-up the rules on employing your children. While they are on the young side, there are some legitimate tasks that they could do which would help me and give them good work experience.

- long term support for kids to get a flat deposit - start S&S Junior ISAs?

As above, they have some funds in JISAs and most likely will get an inheritance from grandparents that would set them up... but don't tell them!

I did a similar calc at the same age 20 years ago. I had similar numbers to you backward adjusted and the end game has turned out well. I'm also impressed with your low spending, particularly with teenagers in the house.

That is reassuring. The low spending is perhaps that we haven't got to the most expensive years quite yet. (Our spending has been even lower over this pandemic year which also suits me just fine!). The kids are (so far) not too materialistic and we always shop carefully for discounts. Some of our overheads like the car, energy and telecoms are slightly offset by the business. Even the spending I listed includes a fair amount for home improvements.

Couple of points. I was very lucky to have had super generous death-in-service benefits from my occupational DC pension so I was always happy that the family would carry on financially on my unexpected demise. A provision for that eventuality should be made.

Good point and as above I have cover. Hopefully what gets me will be fatal rather than a slow lingering demise. If my wife ever works out that I'm worth more dead than alive then she will make sure it's the former rather than the latter!

I also had great pay and benefits, had planned my retirement at 62, but a Black Swan event took all that away and left me incomeless at 60 with no prospect of working again. Whilst it was a shock, I was at least close enough to my exit age to have enough to be able retire. Had this event happened at 50-55, it would have been a much worse place to be. Can't use the pension money and maybe too old to learn a new trade. I did sort of plan for this and made sure that I had a few years income in reserve from the age of 50 to get me over the pension access age.

Well done on getting through it. To be honest, the thought of that ways heavily on my mind - whether a health issue, change in market circumstance, broader economic collapse or even war. We have been more fortunate than any generation in history to experience peace and consistently improving living standards, but obviously there is no guarantee that will continue. I'm not sticking my head in the sand but thinking about all the different coloured swans of debt bubbles, south china sea, energy crises, etc. doesn't get me anywhere but more worried. So my strategy has been a broad financial portfolio, a portfolio of skills, and a survival kit. Don't get me started on worrying about the kids' future though...

I vastly underestimated the expense of having 2 children at University at the same time, particularly if they choose expensive places to go, and I should have started funding that earlier. Also, although one hopes that children will be financially independent by their mid-20's, so often they are not. The boomerang generation can be a bit of a financial drag just as you are approaching retirement.

Good point. It is all in the same pot at present rather than separate notionally pots allocated for retirement, emergency fund, or kids' funds. I am just concentrating on making the overall pot as big as possible. The balance between 'washing' the income tax-free through the SIPP (on the way in) or keeping it in liquid ISA funds is one I need to get right. Hopefully the balances in my post are broadly correct, if not large enough just yet.

Incidentally on the SIPP front, my initial plan was to maximise that pot and take the full tax-free allowance at what was meant to be 55, but I now understand that would block me from paying in to the SIPP again in the future. So that cunning plan appears to have been scuppered.

EDIT: I should add that I am concerned about inflation in all its forms, although not really sure what can be done about it.

While I am worried about all this, I am also enjoying my middle age though.

[hiriskpaul]

Looks like you are doing well. Saving the amount you are whilst bringing up kids is very good.

A few thoughts on your SIPP:

CT at 19% and dividend tax at 7.5% is an effective rate of tax of about 25%. Redirecting instead into your SIPP and later taking a 25% tax free PCLS and the rest at 20% basic rate means an effective rate of 15%. But if you end up above the LTA at 55 you will pay a 25% charge on the excess and lose PCLS on the excess. Net result is an effective 40% rate of tax, assuming you draw at 20% basic rate. So ideally you would pay in sufficiently to hit the LTA after your 55th birthday. Incredibly difficult to do of course, but easier as you get closer to 55 and much easier past 55, provided you are still able to contribute sizeable amounts.

Are you contributing to a SIPP for your wife from your company? If not consider doing that, but check with your accountant first as I am uncertain about the current rules on that sort of thing.

Check that the broker(s) you are using are appropriate for your SIPPs and ISAs. For example, Hargreaves Lansdown would be a very expensive place to hold Vanguard LS funds in your SIPP. Rather than doing that, transfer to a cheaper broker or swap to ETFs instead, where the fees are capped at a much lower level than they are with LS funds.

Make sure you PAYE yourself a sufficient amount to obtain NI credits for the state pension.

[ursaminortaur]

Incidentally on the SIPP front, my initial plan was to maximise that pot and take the full tax-free allowance at what was meant to be 55, but I now understand that would block me from paying in to the SIPP again in the future. So that cunning plan appears to have been scuppered.

So long as you only take the tax free allowance you will still be able to use the full annual allowance for future contributions. It is only if you take taxable income via drawdown that the MPAA kicks in and restricts your future contributions to £4000.

So to avoid the MPAA you just need to crystallise the pension using flexible drawdown and just take the 25% tax free lump sum without taking any further drawdown income. Don't use UFPLS as that results in you taking taxable income as well as the tax free lump sum and thus subjects you to the MPAA.

https://www.moneyadviceservice.org.uk/en/articles/money-purchase-annual-allowance

The MPAA won’t normally be triggered if:
.
.
.
You take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it

[airbus330]

As Ursaminotaur says, taking the PCLS (pre commencement lump sum) from a SIPP and putting the rest into a drawdown SIPP AND not taking any further drawdowns doesn't trigger the MPAA. This is one of the 1st things I did on my smaller pension to combat the sudden UB40 and discovering Universal Credit is as useless as everyone on the radio/tv says!
But, a UFPLS ( Uncrystallised funds pension lump sum) does. This useful flexible access function carries a sting, if you are still working and wanting to build up the pension.

[TAllen]

Looks like you are doing well. Saving the amount you are whilst bringing up kids is very good.

A few thoughts on your SIPP:

CT at 19% and dividend tax at 7.5% is an effective rate of tax of about 25%. Redirecting instead into your SIPP and later taking a 25% tax free PCLS and the rest at 20% basic rate means an effective rate of 15%. But if you end up above the LTA at 55 you will pay a 25% charge on the excess and lose PCLS on the excess. Net result is an effective 40% rate of tax, assuming you draw at 20% basic rate. So ideally you would pay in sufficiently to hit the LTA after your 55th birthday. Incredibly difficult to do of course, but easier as you get closer to 55 and much easier past 55, provided you are still able to contribute sizeable amounts.

Thank you. I was relieved that CT wasn't increased for small businesses yesterday or changes to pension contributions etc. Perhaps I should be washing more income through the SIPP now my funds outside have grown enough to cover our short to medium-term needs. I was fortunate to make a full £40k SIPP contribution last time around, so I will see if I can achieve the same this year.

Are you contributing to a SIPP for your wife from your company? If not consider doing that, but check with your accountant first as I am uncertain about the current rules on that sort of thing.

Not at present, but that's an option. I want to make sure that her eventual pension income fully uses her lower rate tax allowance.

Check that the broker(s) you are using are appropriate for your SIPPs and ISAs. For example, Hargreaves Lansdown would be a very expensive place to hold Vanguard LS funds in your SIPP. Rather than doing that, transfer to a cheaper broker or swap to ETFs instead, where the fees are capped at a much lower level than they are with LS funds.

Currently I'm with Interactive Investor and iWeb. I was expectantly waiting for the Vanguard SIPP to open in the UK but was disappointed when its fees worked out higher (last time I checked).

Make sure you PAYE yourself a sufficient amount to obtain NI credits for the state pension.

Done. There are some other tweaks in that we have R&D tax credits as well. Fortunately business continued as usual over the last year so there was no need to furlough etc.

So long as you only take the tax free allowance you will still be able to use the full annual allowance for future contributions. It is only if you take taxable income via drawdown that the MPAA kicks in and restricts your future contributions to £4000.

So to avoid the MPAA you just need to crystallise the pension using flexible drawdown and just take the 25% tax free lump sum without taking any further drawdown income. Don't use UFPLS as that results in you taking taxable income as well as the tax free lump sum and thus subjects you to the MPAA.

It is a relief to hear that. It was my initial understanding but at some point got confused with the MPAA rules. Nevertheless I will be sure to carefully read-up on the rules.

As Ursaminotaur says, taking the PCLS (pre commencement lump sum) from a SIPP and putting the rest into a drawdown SIPP AND not taking any further drawdowns doesn't trigger the MPAA. This is one of the 1st things I did on my smaller pension to combat the sudden UB40 and discovering Universal Credit is as useless as everyone on the radio/tv says!
But, a UFPLS ( Uncrystallised funds pension lump sum) does. This useful flexible access function carries a sting, if you are still working and wanting to build up the pension.

That is good news. Assuming the Government don't change the rules before I get there.

[Steveam]

Expenditure £28,000 including mortgage of £8,000 - well done.

Do you see this changing? Why not model a few scenarios?

At 45 you look to be in a pretty good position.

Best wishes,

Steve

[Hariseldon58]

Well done, I would second the comment to ignore your house and that puts you well north of £500,000, thats great.

The snowball effect of money making money starts to roll...

Your life style is clearly modest, that really helps the saving but don't forget life is a journey, enjoy the scenery along the way,( I made that error )

I'm not sure about funding the university education, it may seem the right thing to do but is it ? If the children's life choices don't follow the conventional route, then the loans bite the dust, puts pressure on the kids re life choices etc which may prove a huge mistake...

You can always pick up the tab later ( but don't let them know that !!!!) I have seen friends kids pressured into further education and achieving, it ended really badly.

[Dod101]

I was going to comment on University costs as well but felt that I was at least one step removed, since I can nowadays only comment on my grandchildren but it seems to be the thing to take the loans that are available and it seems to me to be sensible. My grandchildren, four of whom are currently at Uni are otherwise pretty self sustaining. Jobs are not that hard to get. One of my grandchildren for instance works in a call centre, except that she doesn't. She works from her laptop in her flat for a Sunday, and a couple of evenings with occasional overtime. No travel costs, and she is quite well paid. Another works in a supermarket and so on.

Hariseldon writes of enjoying the scenery on the way through life. I assume he means life is for living, so we should all really build in some leisure costs since we do not know what the future holds. My second wife for instance died of cancer just after her 60th birthday. Can happen to any of us.

Dod

[TAllen]

Expenditure £28,000 including mortgage of £8,000 - well done.

Do you see this changing? Why not model a few scenarios?

At 45 you look to be in a pretty good position.

Best wishes,

Steve

Good point. I use Moneyhub and export the data into a spreadsheet.

More accurate spends per year (rounded) excluding mortgage:

2018 £25k
2019 £26k
2020 £20k

So yes, it is higher on average. 2018/2019 included good international holidays, but last year was a UK cottage. 2020 could have been lower but included improvements to the house and other splurges to make lockdown more special. 2021 could be another lean year with just UK holidays planned.

A rough typical breakdown based on the 2018/19 years:

Shopping (inc groceries) £6.8k
Household £5k
Entertainment £4.5k
Bills and Utilities £4k
Transport £1k
Health £1.5k
Gifts £1k
Other £1k

There isn't a great deal of lifestyle inflation planned other than kids' education, kids' entertainment costs and family holidays.... while we still get the chance...

Our mortgage has two years to run at 2% so we could run into higher rates at renewal. I'm tempted to increase our mortgage repayments from £680 a month to £1k (i.e. £320pm overpayment) for a while.

This has turned out to be a very useful exercise and I really appreciate everyone's kind inputs.

[TAllen]

Well done, I would second the comment to ignore your house and that puts you well north of £500,000, thats great.

The snowball effect of money making money starts to roll...

Your life style is clearly modest, that really helps the saving but don't forget life is a journey, enjoy the scenery along the way,( I made that error )

I'm not sure about funding the university education, it may seem the right thing to do but is it ? If the children's life choices don't follow the conventional route, then the loans bite the dust, puts pressure on the kids re life choices etc which may prove a huge mistake...

You can always pick up the tab later ( but don't let them know that !!!!) I have seen friends kids pressured into further education and achieving, it ended really badly.

As it happens, I was reading a Moneyvator article on the pros and cons of including the house in calculations. Unintentionally this could shape up to be our forever home until we need care, so I guess the value doesn't matter. It has low maintenance costs as well.

I was going to comment on University costs as well but felt that I was at least one step removed, since I can nowadays only comment on my grandchildren but it seems to be the thing to take the loans that are available and it seems to me to be sensible. My grandchildren, four of whom are currently at Uni are otherwise pretty self sustaining. Jobs are not that hard to get. One of my grandchildren for instance works in a call centre, except that she doesn't. She works from her laptop in her flat for a Sunday, and a couple of evenings with occasional overtime. No travel costs, and she is quite well paid. Another works in a supermarket and so on.

Hariseldon writes of enjoying the scenery on the way through life. I assume he means life is for living, so we should all really build in some leisure costs since we do not know what the future holds. My second wife for instance died of cancer just after her 60th birthday. Can happen to any of us.

In terms of funding their education, I was going to propose the route of letting them take the loans but being ready to assist where it provides longer term benefit. So far they have been very sensible and should be quite employable, even in the changing nature of the jobs market.

You are both correct on getting the balance of 'living'. My wife and I are very fortunate to have travelled extensively and done more than enough on anyone's bucket list. Our adventures are not over by any means but in terms of travel there are few places left that we yearn to visit, or visit again, particularly given that now many are unpleasantly over-touristed (well, until the pandemic). Our priority is now the 'sandbucket list' of places to visit and experiences to give the kids. In terms of material possessions, we are actively de-accumulating to keep life simple and minimal. If I was told I had a month to live, I wouldn't have any regrets (other than not being around for the kids) as I have had a fortunate life. Any experiences from now on are a bonus and my biggest satisfaction will be helping the kids and hopefully, one day, grandchildren.

Before I get too soppy, I should add that I started with nothing but the support of wise and loving parents which, of course, is everything. I want to pay that gift forward.

[MyNameIsUrl]

On the question of paying for the kids' uni rather than them having student 'debt', I suggest they and you research this - for example https://www.moneysavingexpert.com/stude ... s-changes/.

As there are no repayments until earnings over £27k, many will pay very little back, so your potential funding of all fees would be throwing money away. For example, I know a self-employed potter who will never pay a penny of her loan. I also know a young commercial lawyer who paid his off (because of high earnings) in just a few years with very little interest paid. Anything in between you need to consider carefully. After all, you can still give them a cash lump sum after they graduate.

[Moosehoosenew]

As we have been nursing 2 ageing parents who saved like we would al do in their forties. Can I nicely suggest spend a little more on yourselves, it is an absolute shocker when fit an able realise they have saved to much.......................

[genou]

As above, they have some funds in JISAs and most likely will get an inheritance from grandparents that would set them up... but don't tell them!

It's at a tangent to the thread, but that's a very bad mistake. Talk to your children about money, about what they already have and may well inherit. Get them to think about what they want to do with it before they have it. When the JISAs mature it's free money to your children. Might be nice if they had a plan for it.

[xxd09]

I told my kids not to take any loans and I would fund them through uni for 5 years
I did expect them to pass their exams in return
How can children finishing education at 23+ buy a house ,get married and have kids in a reasonable time frame if they start out after college with massive debts-a situation to be avoided if at all possible
Debts are an extra pressure on girls whose ability to have kids successfully declines rapidly as they age-time is not on their side
My parents did not let it happen to me and I didn’t let it happen to them
All the kids now qualified in good jobs,all married and all have children
Probably cost upwards of £25000+ each in the 90s
It’s a tough one for parents
xxd09