Money makeover is a new monthly series on the Adviser Points of View website in which various people at different life stages, seek financial advice from a financial adviser for the “first time”.

The first makeover this month involves John and Sally from Wolverhampton who recently inherited £50,000 when John’s grandfather died.

John and Sally originally contacted [Keystone Financial Limited] as John’s grandfather had just died, and they had inherited a small but significant sum (£50,000), which they felt should be used, at least partially, toward their retirement savings. John is 46 and Sally is one year younger. It isn’t unusual for people of this age to suddenly start thinking about their retirement incomes and they panicked somewhat.

John is a self-employed design engineer earning £55,000. Sally is employed, earning £20,000 working at a local nursery as an administrator.

John has the bulk of the pension savings in his name, having worked for various firms in the past, most of whom provided pensions of some sort. A couple of years ago, when he became self-employed, he amalgamated all the small funds he had accrued over the years into one simple, good value pension fund.

The only other incomes they have are £950 a year interest, from savings in John’s name and £1,788.80 per annum (pa) child benefit for the two children, which Sally receives.

John has made no pension contributions at all this year, but Sally is a member of the scheme at work which contributes minimum auto enrolment amounts for her, so she will have had a total of £1,000 paid into a pension in her name this year.

My starting point (pictured left, Harriet MacKenzie-Williams, Keystone Financial Limited) was to suggest that John make a pension contribution of at least £5,000 to reduce his income to under the £50,000 mark. This would have the effect of ridding him of the tax charge on the child benefits they receive, saving him £894.40 in tax each year.

By increasing this contribution to £9,000, taking his income back into the basic rate tax bracket, would have the additional benefit of ensuring that the interest he earns would fall into the £1,000 tax free allowance. Thus, saving a further £380 in tax each year.

I then recommended that up to £19,000 can be used as a single contribution into Sally’s pension to start toward aligning their benefits more closely to ensure maximum tax efficiency at retirement.

This left them with circa £22,000 which I recommended that they partially use to reduce their mortgage balance (£15,000), keeping their payments the same, would mean that they finish their mortgage just shy of four years earlier than they would now and save £4,800 in interest to boot! I suggested that they keep at least some of the inheritance back and have a family holiday to remember.

Edited by Sabuhi Gard

Further reading on this topic:

What to tell your clients about an increase in probate fees?