‘I have five years to build a retirement pot from scratch – can I do it with £1m?’

Money Makeover: our reader wants to secure his financial future after a divorce

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Divorce is never pleasant, and for Seamus Gille, 65, separating from his wife represents a financial crossroads.
Amid the legal fees incurred by splitting his assets with his now ex-wife, Mr Gille is contemplating how to build a retirement fund from a standing start.
It has not been an easy road for Mr Gille, who has faced redundancy twice in his career. As such, he and his now-ex wife were used to spending as they earned.
Mr Gille has just £30,000 in various savings schemes and no portfolio of shares to speak of. His pension savings are also modest – following the divorce, he expects it will pay him a mere £28,000 a year.
Luckily for him, Mr Gille is mortgage-free and at the peak of his earning power, pulling in some £200,000 a year as a freelance consultant.
He says: “It’s not inconceivable to work another five years. I don’t want to stop when I’m at the top of my game.”
Indeed, Mr Gille hopes to retire in five years, by which point he will have earned £1m.
Mr Gille’s work often takes him abroad and he envisions a retirement in which he can still travel. “I speak French, so I could live in France. I want to continue to travel while I’m still fit. I love the arts and I go to museums and the theatre a lot.”
Mr Gille and his ex-wife are set to split their assets 50-50. The home they own in Potters Bar, Hertfordshire, is expected to sell for £1.1m – leaving Mr Gille with around £550,000 that he hopes to use to buy another home in cash.
“I am sinking £1,800 a month into my rent at the moment,” Mr Gille says. “St Albans is the costliest rental location outside of London because it’s all young, middle class, aspiring families. It’s a lot of money just for the sake of living here, so the sooner I can extricate myself from that and move into a mortgage-free property the better.”
Mr Gille has four adult children, who are “doing variously well”. He gifts them £200 a month each towards their lifetime Isas, but doesn’t plan to leave them any inheritance beyond whatever property he retires in.
“I’ve had a fantastic life. I’m very happy,” he says. “Shame about what’s going on right now, but I want to know how I can use my healthy income to build up a nest egg – how do I do that?”
Mr Gille has lived a comfortable existence throughout his working life, but will likely be unable to replicate his current living standards to the same extent once he retires.
He is fortunate that he has pension income that will pay him £28,000 per annum, which, when added to his state pension, will mean his retirement income at present will be in the region of £39,500pa, approximately 20pc of his current earnings.
Mr Gille is on track to earn £1m over the next five years and should start to save as much as he can from his income to boost his chances of having his desired retirement lifestyle. Saving significant amounts now will also help to adapt his current spending habits to better reflect his likely retirement income reality.
I would suggest that Mr Gille looks to ensure that he saves £20,000 into a stocks and shares ISA every year, perhaps reinvesting the amount he currently spends on rent into such a wrapper.
Isas are completely free of any income and capital gains tax, and there would be no tax consequence for withdrawing lump sums to fund his retirement in the future.
With respect to his remaining savings, Mr Gille should apply these to his pension, to which he will be eligible to claim higher rate tax relief of 45pc, enabling him to accrue more now in his pension while potentially extracting the pension funds at a lower tax rate once he retires.
He could contribute up to £60,000 this tax year, although with pension carry forward he can use up to three of the past years unused allowances to contribute more than this amount.
As he intends to work for three years past his state pension age, Mr Gille could choose to defer his state pension, which would increase by 1pc for every nine weeks he defers it.
Over a three year period, this would mean that his state pension could increase by approximately 17pc, taking his state pension from £221.20 per week (£11,502 per annum) to £258.80 per week (£13,457 per annum).
Alternatively, Mr Gille may choose to take his state pension at age 67 and reinvest the full amount into his personal pension. As an additional rate taxpayer, Mr Gille will receive additional rate tax relief on his contributions, potentially boosting his pension pot.
The simplest solution may be for Mr Gille to purchase his new home outright for £550,000, investing all his money from the divorce settlement.
The advantage of this approach is that he would have no mortgage, so would save the £1,800 a month he pays on rent, which could be invested in a pension.
However, this may not be the most suitable advice for Mr Gille given he is only five years from retirement, so there is not much time to build up pension savings (a total capital contribution of £108,000 over five years).
It might make more sense to invest more money now for his retirement while his earning capacity is significant. This could involve taking out a combination of different mortgages to enable maximum borrowing while taking into consideration reduced capacity in retirement.
If he makes a lump sum pension contribution, the current maximum allowance is £60,000. If Mr Gille has not made any contributions in the previous two years, he can also make retrospective contributions (£60,000 and £40,000 accordingly).
In line with the above, Mr Gille can potentially consider taking a mortgage of £140,000 over five years, assessed on his earned income, enabling him to purchase a home.
A repayment mortgage would be £2,610, assuming a rate of 4.5pc, and it would be paid off in five years. There would be no liability in retirement and no monthly payments after the age of 70, leaving his retirement income for day-to-day expenditure, as well as interests and travel.
The next step at retirement would be to take a mortgage based on his retirement income. Ignoring any potential increase in pension and assuming the pot will be £28,000, the loan he can raise is circa 4 to 4.5 times his income, or up to £126,000.
These funds can be invested in financial instruments to supplement his income in retirement. Based on an interest-only basis with a 5pc payrate, the monthly payment would be £485. This mortgage can be taken on an interest-only or repayment basis, with a term of 10 years or longer.
If he opts for interest-only, the loan can be paid off from potentially downsizing later in life. If he took a 10-year term until age 80, he might decide to downsize, repay the loan and have a mortgage-free property, or choose to stay in the property and consider another approach.
Mr Gille may also consider raising a lifetime mortgage at the age of 70 and potentially release £231,000 (the maximum amount currently available for a 70-year-old). Or, if he converts the interest-only mortgage at the age of 80, he can release £286,000, repay the interest-only loan and release a further £160,000.
The lifetime mortgage is typically interest only with payments added to the capital, although some lenders allow the payments to be made from retirement income. With the former, the property is sold on death and the equity, if any, can be left to the estate.
Mr Gille can opt for one, two or all three of the options above and release funds for retirement – initially £140,000, then an additional £126,000, and later on a further £160,000, which can be utilised and invested in his retirement at the ages of 65, 70 and at 80.
A good broker and financial planner working together would be extremely beneficial to build and work on his retirement plans.