Personal Financial Planning - Case Study Example

Personal Financial Planning – Case Study Review and Amended Investment Plan: The investment advice provided by Sid Sharp does not take into account many factors related to Kevin, such as his attitude towards risk, the time he can afford to manage the investments and his future ambitions. Hence it is essential to include all these elements into the investment advice and amend the plan as necessary. First and foremost, the total portfolio amount considered by Sid Sharp is not accurate, as Kevin has spent on few accessories and gifts. The total amount remaining from the fortune is not actually £ 10.8 million, as considered in the investment plan. The following expenses have been incurred: Details Amount Laptop £1,000 Toyota Prius £21,000 i-Phone and Party £8,000 New Flat £200,000 Stuff for Flat £20,000 Mothers Vacation £1,000 Cabriolet to Mother £9,000 Baby Paraphernalia £2,000 Total £262,000 Hence the total amount remaining in the account is £ 10,538,000. Though the advice given by Sid Sharp covers all the priorities of Kevin, a number of changes can be made to provide an effective solution to his issues. A more appropriate plan to take care of his priorities regarding his friends and family is presented in the table below. Balance in Account £10,538,000 Gift to Mother £250,000 (PET) Discretionary Turst for Rodney £300,000 (Nil - Rate Band) House for Leanne £220,000 Gift to Slough Light Railway Club £24,000 Gift to Sharon £24,000 A & M Trust for Melanie £80,000 (IHT Exempt) Gift to Mother for Anthea £150,000 (Standing order to payout £3000 per year £1,048,000 Remaining Funds £9,490,000 It is evident that most of the tax liabilities have been removed, utilising the various allowances and PETs (Potentially Exempt Transfers), as Kevin is very young 20 years, same as Anthea, his twin sister) and the tax liability arises only in the case of the person’s death within seven years of the transfer being made (HMRC, 2009). It is evident that this is a highly improbable situation and hence transfers can be made without the tax liability. The investments should also be amended to include the risk attitude of Kevin, which in this case is assumed to be ‘moderately aggressive’. Also, the current global economic slowdown should also be taken into account, in order to arrive at a profitable investment plan. Based on these factors the investment plan for Kevin can be amended and is presented in the table below: Assuming that Kevin pays 0.5% of the initial portfolio amount (£ 52,690), the rest of the amount that will be kept in the current account is computed as Funds in Current Account = (£9,490,000 - £8,500,000 - £ 52,690) = £ 937,310 2. Reasoning for the Amendments: The advice sent by Sid Sharp regarding the distribution of gifts and aids to the friends and family of Kevin was amended for a number of reasons to reduce tax liabilities and also to exploit the allowances provided. i. The accumulation and maintenance trust opened for Aunt Melanie is potentially exempt from Inheritance Tax, provided the individual concerned is alive for the next 7 years (Thornton, 2009). Hence the inheritance tax need not be taken into account and the amount can be directly transferred to the accumulation and maintenance trust. ii. Similarly the Inheritance Tax also enters the PET (Potentially Exempt Transfer) in the case of gift to ex – girlfriend Sharon. Hence a total of £ 24,000 can be transferred to Sharon as a gift, as the £ 8,000 will be exempt (Bayley, 2008). iii. The recommendation made by Sid Sharp regarding the payment to Slough Light Railway Station will be perfect, as Kevin can control the spending and pay £ 2,000 per month and will not incur any Inheritance Tax as it is considered to be a donation to the registered charity (Solomons, 2009). iv. The discretionary trust can be formed for Rodney. However, the assets can be transferred to the trust and the nil – rate band can be utilised to escape the tax inheritance liability. The nil – rate band currently stands at £ 312,000. The trust can be accompanied with a ‘letter of wishes’ stating that the interest earnings can be paid to Rodney once he reaches the age of 21. This will enable Kevin to fully utilize the benefits of the nil – rate band (Rothman Pantall, 2009). v. In order to provide for his sister Anthea, Kevin can transfer £ 6000 in the current year and this will be tax exempt, as a gift of £ 3,000 for this year and another £ 3,000 for the previous year can be made to anyone person without paying Inheritance tax (Wills Guide, 2009). He can then open an account and transfer the remaining £ 144,000 and create a standing order to transfer £ 3,000 every year to his mother to take care of Anthea. The investment portfolio recommended by Sid Sharp has been amended to include the risk characteristic of Kevin. A research was conducted on the profitable investments in the market and a portfolio was laid out based on the research findings. i. The investment on derivatives is kept at £ 2,000,000 and is not altered. The reason is that the derivatives are high risk investments (Samuels, et al, 2000); however in this scenario, the futures and forwards are less susceptible to losses than the high risk equities and shares. ii. A total of £ 4,000,000 is invested in stocks and shares. Spread betting is avoided, as it has a high rate of losses recorded and also a sufficient amount of time has to be dedicated to manage the spread betting accounts (Burns, 2006). a. A sum of £ 1.5 million is invested in UK Small Cap Equities, especially the high return ones, including the Close Special Situations Fund (average return of 90%), Close Beacon Investment Fund (return of 70%) and some less risky small cap equities (Morningstar UK, 2009). b. One million GBP is invested in Blue Chips which include larger corporations which have a steady income. This can be invested in funds such as Rathbone Blue Chip Income and Growth Fund which focuses on a portfolio of 40 stocks in UK equities and invest 75% in FTSE100 Index stocks. The reason for these funds being the safe bet is that the investing companies are chosen based on their scale of operations and track record of the management and growth rates (Rathbones, 2009). c. The remaining £ 1.5 million is invested in global funds, so that the portfolio of stocks is very diverse and they are not affected by common factors. The funds can be chosen based on the risk profiles of the companies and regions. Companies with moderate returns can be chosen for these global funds. iii. The investment on treasury stocks is kept unchanged at £ 1,000,000. They are comparatively low risk, low return investments. However they are a safer investment as the original investment is unaffected and is guaranteed. iv. A sum of £ 1,500,000 is deposited into a Fixed Rate Savings Account in a financial institution such as, Halifax (MoneySuperMarket, 2009). The interest rate provided on these fixed rate savings accounts is around 4.30% which is a considerable return for the investment. Moreover, in case of emergencies, these funds can be withdrawn by paying very low penalties. 3. Investment Strategy for the Rest of the Funds: The legacy obtained from Aunt Winnie has been effectively utilized to address some of the most immediate issues for Kevin and also a sufficient sum, about £ 8.5 million has been invested on a portfolio tailored to match the risk attitude of Kevin and also the most profitable and safest investments in this current economic scenario. As computed earlier, the funds remaining in the current account amounts to £ 937,310. It is essential to devise an effective investment strategy for this amount to cover the long term interests and goals of Kevin, who is now a millionaire. Goals: As Kevin is about to give his final exams, it can be assumed that he will be completing his studies shortly. Hence it is essential for him to devise a plan for his future career. If he had not inherited this fortune, the best possible choice for him would have been a job at a prestigious software firm. However, he is now a millionaire and hence can focus on his long term goals. It is evident that Kevin is very interested in opening a software firm and has the necessary technical skills. He is keen on competing with the world’s popular and high revenue software firm, Microsoft. To achieve his dreams, Kevin has to plan his start up and devise a step by step strategy towards his goals. Skill Set Required: It is very evident that Kevin is very organized and thinks strategically in dealing with any potential issues and also, his risk attitude has been assumed as ‘moderately aggressive’. The issues he might potentially have are in the fields of managing finances, managing personnel (assuming that he is totally into computers and has avoided much of social interactions and has not had the experience of dealing with personnel). Though he is a millionaire and has an amazing knowledge in computers and software, he needs a lot more skills in order to become an entrepreneur and also to sustain and increase his fortune. Hence the first requirement towards fulfilling his dreams will be to obtain the proper skills. Taking all these factors into account, the best step to be taken after his final exams, is to apply for a Managerial program, such as MBA (Master of Business Administration) for freshers. This will provide him with the necessary qualification and confidence to become a successful entrepreneur. Most MBA programs (for freshers) are one year full – time programs and the expenses (including his tuition and living expenses) can be assumed to be £ 37,310 (Infozee, 2009). At the end of the one year program, Kevin will have £ 900,000 left in his current account. Setting up a business is the most profitable investment, provided the entrepreneur has the skill set required to make it a success. Business Set Up: The business model will be start with in - house products (software) and at the same time get clients to in need of small scale software to manage their accounts, business, etc.., Kevin can register the business as ‘WinnieSoft Plc’. As Kevin can afford to start up in a medium scale, a serviced office will be leased and required personnel will be recruited. Initially, a maximum of 10 members can be recruited to work under Kevin, who will be chairman. The expenses are estimated as follows: Details Expenses Registration and Legal £20,000 Serviced Office £100,000 Infrastructure (Furniture, Computers, etc) £100,000 Software Licenses and Set up £50,000 Other Expenses £30,000     Total £300,000 The monthly expenses are estimated as follows: Details Expenses Chairman’s Salary £5,000 Salary (10 * 2500) £25,000 Other Expenses £20,000     Total £50,000 As the chairman of the company, Kevin can initially draw £ 5000 as his salary per month. He has to pay an income tax of £ 14,000 per annum (ListentoTaxman, 2009). He can opt for an insurance policy to cover the ‘hidden’ tax liability of his inheritance also to benefit from tax deductions. The premium can be paid with the salary received. This investment plan will set up the business for Kevin and will be a start up for him to achieve his wishes. Contingency Plan: The amount remaining in the current account after set up will be £ 500,000 which will be sufficient to run the business for 10 months without any revenue. Assuming that the business set up by Kevin starts to generate revenue from the 5th month onwards; the remaining £ 250,000 can be maintained in the current account as a contingency. Conclusion: The plan devised for Kevin will address all his immediate issues and also provide him a safe, high return investment portfolio worth £ 8.5 million. The investment plan for the remainder of his funds has been utilised to set up his business. Kevin adds another qualification which will help him manage his finances and also manage the business effectively. Business is evidently another form of investment and serves to achieve the long term goals of Kevin. The total returns from all these investments are significant (as outlined in the previous sections) and the £ 10.8 million is put to best use. Bibliography Bayley, C. (2008), ‘How to Avoid Inheritance Tax?’, Accessed on 3 May 2009, Available at http://www.taxcafe.co.uk/inheritance-tax.html Burns, R. 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(2009), Inheritance Tax – 2009/10 Rates and Allowances, Accessed on 4 May 2009, Available at http://www.rothman-pantall.co.uk/content/taxcentre_taxcard/inherit.html Samuels, J. M., Wilkes, F. M. and Brayshaw, R. E., 2000, Management of Company Finance, 6th edn, Thomson Learning, London Solomons, P. (2009), IHT – Solutions, Accessed on 3 May 2009, Available at http://www.iht-solutions.net/home/2009/04/a-new-tax-year-a-new-iht-nilrate-band.html Thornton, G. (2009), Trusts, Wills and Inheritance Tax, Accessed on 3 May 2009, Available at http://www.is4profit.com/is4money/tax/discretionary-trust-wills-inheritance-tax.html Wills Guide, (2009), Inheritance Tax – Exemptions, Accessed on 4 May 2009, Available at http://www.clickdocs.co.uk/inheritance-tax.htm Read More