Planning Personal Finance
Neil and Jennifer live at 14 Kirk Loan, Dufftown. They have two children, Laura and Jack, aged 10 and 7 years respectively. They have just bought a new house in nearby Braeside Crescent on which they have a moving in date of three months’ time, and are currently in the process of selling their old house at offers over £250,000. Three offers have been received by their solicitors as follows:
- £254,500, with a moving in date of two months
- £256,000, with a moving in date of three months
- £258,000, with a moving in date of four months
Their new mortgage will be £710 a month starting on the 1st of the month in three months’ time. Their current mortgage is £625 a month. House insurance on the old property is £95 a month, while on the new property it will be £110 a month.
Neil inherited 10,000 shares in a local distillery company from his father when he passed away from the effects of alcohol last year. Despite not drinking alcohol himself, Neil has felt obliged to keep the shareholding for sentimental reasons, despite a recent sharp fall in their price on the stock market when it was announced that annual profits were slightly down on the previous year.
Jennifer’s widowed father recently gave up work as a lawyer due to a minor heart attack. Luckily he had taken out a Critical Illness Insurance policy which paid him a lump sum of £66,000, although he wonders whether he might have been better off with a Permanent Health Insurance (PHI) policy. He worked as a lawyer in a local law firm for over 20 years and is now 58 years old.
His father-in-law’s illness caused Neil to reflect on his own financial position and he realises that the family has no life insurance, and, indeed, has done little by way of general financial planning. Jennifer agrees with him that they need more protection, starting with insuring each other’s lives just in case something unexpected should happen to one of them. She also recommends that they insure the lives of their two children.
Neil and Jennifer each have their own car, enjoy reading and are members of their local golf club. Jennifer likes to go horse-riding when she can find the time and Neil likes to go caving with friends at the weekends in the surrounding hills. Neil doesn’t think that any of these pastimes would need to be mentioned on any insurance proposal form. They also feel that they should be thinking about school fee plans for when the children are ready to go to secondary school, and even more so if they should decide to study at university for four or five years.
Neil earns £48,000 a year from his employment as a Brand Manager for one of the whisky companies in the area, while Jennifer earns £32,000 as a teacher in nearby Aberlour. They have a joint current account that pays 0% interest but Jennifer earns £20 interest per year from a savings account she holds with Speyside Bank. Neil also owns 5,000 BizCo Ltd. ordinary shares that are currently trading at 950 pence (which he bought five years ago at 235 pence each). He earned £1,662.50 in net dividends from these shares last year.
In January this year, Jennifer bought £8,000 nominal of 6.0% Treasury stock, redeemable in 2028. The price of this stock is currently £150.77 per £100 nominal.
Answer the following questions
You are giving financial advice to Neil, Jennifer, and Jennifer’s father. The advice is for tax year 2015-16.
- Neil and Jennifer are unsure about which offer to accept for their old house. Advise them as to which one would be best for them, giving your reasons. (6 Marks)
- What advice would you give to Neil regarding selling or holding onto his distillery shares? (6 Marks)
- Explain to Jennifer’s father whether and why you think he is right or wrong regarding his feelings about perhaps being better off with a PHI policy rather than the Critical Illness policy. (6 Marks)
- Read carefully what Neil and Jennifer have said regarding their life insurance needs and school and university fees plans. Bearing in mind all they have said, what advice would you give to them? (14 Marks)
- You have no information so far on the pension arrangements of Neil and Jennifer. On enquiring into this, you discover that Neil has been contributing 10.8% of his salary into his company’s final salary scheme for 12 years and he is now aged 36. This is an 80ths scheme, with an additional one-off tax-free lump sum of three times his pension on retirement. The NRA of his company scheme is 60 years of age. Jennifer is aged 34 and has been paying £150 per month (net) into a Personal Pension for the last 5 years.
Explain what their current pension positions are, and what they can expect to receive in retirement (including State Pension). In addition advise them on how they could improve their pensions in the future and how this can be tax-efficient for them. (14 Marks)
- Each year Neil pays £400 direct to the Craigellachie Foundation, a registered charity. He also pays £2,000 direct to his nephew who is a full-time student at Grampian University. Neil has now decided to sell half of his BizCo Ltd. shares at the current price of £9.50 each. From all of the information provided, calculate both Neil’s and Jennifer’s tax liability for tax year 2015/16. (20 Marks)
- Advise Jennifer whether it is better to sell the 6.0% Treasury stock 2028 or keep it until redemption date. Provide evidence to support your reasoning. What are the gross interest yield, the net interest yield and the net redemption yield on the stock?
In addition, how much did each of Neil’s BizCo shares pay out in dividends last year (in pence), and what is the current net dividend yield on these shares? (10 Marks)
- Neil and Jennifer’s mortgage on the old house is a low-cost endowment one. Their mortgage on the new house is a capital and interest repayment one. Explain what the main differences are between them. (6 Marks)
- Neil is thinking of investing in OEICs and has been advised that it is normally better to invest in a monthly savings scheme than to buy shares with a lump sum payment. Clearly explain to him (with a relevant example) how this can be, and as such, how Pound Cost Averaging (PCA) works in practice.
- Neil and Jennifer have just bought a new car for £11,550 on hire purchase credit over 7 years at 6.25% per annum. There is also a one-off set-up fee of £595 for the hire purchase. Calculate the APR. (4 Marks)
- Calculate the following on Jennifer’s father’s two bank accounts:
- The compound interest and therefore the total return on £15,240 deposited at 3.05% over five years.
- On a balance of £9,884.63 inclusive of compound interest at 4.75% over three years, how much, therefore, is the original capital sum deposited in this case? (6 Marks)
Total Marks: 100
You may, if you wish, undertake this assessment in pairs.
Your written answers are to be around 2,500 words (+/- 10%) not including References and Appendices. Marks will be awarded for appropriate research and correct citations and references where required. Use the Harvard Reference System throughout.