Case Study: Company Executive

Company Executive – Tom and Aileen O’Neill

Tom initially approached Curran Financial Services to discuss an old pension plan that he needed advice on. Following our free initial consultation, where we discussed his pension plus a number of other issues, we wrote to him and recommended that he take up the Financial Independence Plan so we could examine all aspects of his financial life and help him make sense of his long term goals.

Tom and Aileen agreed to our proposal and completed a detailed fact-find with our help, as well as the Life Goal Questionnaire. They found this part of the process, which they completed in their own time and by themselves, extremely helpful, as it forced them to think about aspects of their lives that they had previously given little consideration to, and really focused them for the advice that would follow.

Tom and Aileen had the following profile:

  • Married, in their 40’s, with 2 children
  • Tom is a senior executive in a large multinational earning a good salary with strong potential for bonus. Aileen is a self employed dance teacher, though she manages a number of other teachers in her business also.
  • Tom receives his bonuses in the form of Share Options, which he holds until they realise and then either keeps them as share certificates or cashes in. He has a significant number of shares currently.
  • They have 4 properties – the family home, 2 Irish investment properties and an apartment in the UK. Most of the properties are in significant negative equity and they are heavily subsidising the apartment.
  • Tom is a member of his employers pension scheme and contributes the mandatory amount but no more. He also has a few old pension plans from previous employment, but knows nothing about their current value, performance etc.
  • Aileen does not have a pension, though her accountant told her it would make sense for reducing her annual tax bill.
  • They have a relatively ad-hoc method of saving – putting childrens allowance and other excess cash into a simple deposit account that they can then access for lump sum payments (holidays, car insurance etc). This account has a large balance.
  • Tom’s pension scheme has a ‘Death in Service’ benefit, which he feels would be sufficient for the family to live on because their properties all have basic mortgage protection built in. His job also provides illness benefit if he was unable to work. Aileen has no insurance other than for the mortgages because they felt that Tom’s salary would be enough to raise a family alone if necessary.
  • Tom pays a significant amount of tax due to his salary, and while he understands that this is unavoidable he is keen to explore any options to reduce his liability.
  • They’ve never thought about their attitude to risk in any detail, but believe that Tom is likely more comfortable with an investment making a loss, while Aileen would be very conservative.

On receipt of the above information (gathered through an intensive question and answer session), Curran Financial Services took it away and prepared a Financial Plan for Tom and Aileen. This plan was presented in two parts.

Part One: Current Needs

Before looking at their future goals (i.e. Financial Independence) it was necessary to examine Tom and Aileen’s existing financial situation under a number of criteria:

  • Suitability
  • Structure
  • Cost Effectiveness & Performance

The following recommendations were made as a result:

Pensions:

  • We transferred all of Tom’s old pension schemes into a single Self Directed Plan, thereby reducing administrative headache for him and keeping costs to a minimum. Any decision on an investment strategy could wait until the next stage of the review, which meant that we could focus solely on the structural benefits rather than trying to lead the conversation with talk of funds etc.
  • After analysing Tom’s current company scheme, we noted that he was invested in the default ‘consensus’ fund, which may not have been appropriate for him. We asked for a full list of the funds available in the scheme, and noted that we would recommend a more tailored strategy for him in the second part of the review.
  • Tom was not making AVC contributions as part of his pension plan, as he was unhappy with the performance of the scheme funds. We helped him setup a personal AVC, eligible for the same tax relief, where he could control the investment strategy better.
  • Aileen recognised the need to start a pension in her own name. However before we went ahead with this exercise, we spent some time analysing her business and determined that it would be more appropriate to incorporate as a limited company. We spoke with her accountant who recognised the merit of our recommendation and he assisted her in changing the status of the business. As a result we were better able to manage the cashflow, taxation and retirement planning aspects of this business, along with improving her chances for a tax efficient exit in the long term.

Savings

  • The ad-hoc nature of Tom and Aileens savings strategy needed addressing. We recommended that the equivalent of 6 months salary should be kept in a dedicated ‘Rainy Day Fund’. As this fund would not be accessed except in exceptional circumstances, we advised that they could use an online trading account/platform to purchase an appropriate portfolio that would hopefully provide better long term growth. The funds to be purchased would be agreed subsequently.
  • We also recommended that their children’s allowance payments should be separated from all other savings, as they should go towards the future cost of education etc. After looking at the various offerings on the market it was agreed that the Post Office provided the most secure option with potentially tax free growth over time.
  • Any further savings were to be directed to a dedicated account with the intention of growing as part of their assets intended for Financial Independence. Due to the projected long term nature of these savings, we advised  on an equity based plan that should give better returns over time than deposit based ones.

Life Assurance

  • Tom and Aileen’s life assurance was wholly inappropriate for their needs. They were paying far too much for their mortgage protection and, while Tom’s employee death benefit was significant, he had seriously underestimated how much the family would require in the event of his death.
  • Similarly, Aileen’s belief that the family would not need any protection for her life was based on a premise that Tom would continue working full time in that event. Through the completed questionnaires we were able to show that in fact Tom prefer to not work the same hours (or the same wage) in the event of hear death.
  • We were able to apply for cheaper mortgage protection policies on the properties, which almost completely offset the additional cost of setting up a dedicated ‘Family Protection’ policy. Overall Tom and Aileen were delighted with the security of this additional cover for negligible extra cost.

Mortgages

  • Due to the level of negative equity on their Irish properties we were not in a position to make any recommendations around their mortgages, though we did advise that they hold on to their tracker rates unless offered a significant write off to change in future.
  • After calculating all the likely future costs and expected returns for the UK apartment it was clear that if possible they should sell the property. We assisted them in doing so and by that took away a huge burden, both financial and personal.

Part 2 – Future Planning

Targets

  • We discovered that Tom and Aileen have a current NET ASSET VALUE (that is the value of all their assets minus all liabilities, not including their principal residence) of €375,000 – primarily made up of pension funds.
  • They decided that their goal was to have enough money built up by age 65 to provide them with an (after-tax) income of €75,000 per annum.
  • To reach this target, the recommended additional monthly savings were €1500.
  • Tom and Aileen were categorised as Balanced Investors, meaning they were comfortable with some risk, but not too much.
  • Balanced Portfolio, incorporating all existing assets, was designed using our proprietary investment tools. Our portfolio’s, discussed in more detail here, allow our clients to fold various existing and future assets into a single investment strategy that will provide an estimated return based on comprehensive historical analysis.
    • The advantage of building a portfolio like this is that we were able to allocate various types of asset class into the different structures (such as Tom’s company scheme, the investment properties and current share portfolio’s) .
    • This meant that we did not necessarily need to sell off any existing assets to make investing easier, though we did advise that Tom divest from some of his share certs for the sake of diversification.
    • We therefore created a ‘Holistic Family Portfolio’ that should grow in line with expectations and deliver the necessary capital to provide for their income requirements in retirement.
  • We also introduced Tom and Aileen to some tax relief plans, including Film Relief and EII Schemes, that gave them access to investment opportunities and reduced their tax bill.

 

Summary Of Case Study

  • Tom and Aileen now have a much clearer idea of their financial goals, and with the formal structures we helped them put in place are now far more likely to reach their targets.
  • Since our initial review we have met Tom and Aileen a number of times to ensure that the plan is being followed and their investment strategy is performing as expected. They are now much more educated on the idea of efficient investing and understand the benefits of our holistic portfolios.

 

 

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