A Lamborghini for the price of two coffees
The Institute of Fiscal Studies, (IFS) published some interesting research in a couple of weeks ago. Called “The use of wealth in retirement” it suggested that, unless there are large costs at the end of life (and they show that for many that is not the case) the majority of financial wealth among those currently retired is set to be bequeathed rather than used to finance retirement spending. Good news for the children and grand-children!
Understandably, the IFS definition of wealth excluded the value of defined benefit pension schemes. But we know from transfer value illustrations, this “invisible” category of wealth can be very valuable indeed. And I suspect that for the currently retired, defined benefit pension payments are the reason that many are able to plan to leave bequests. For those with defined contribution schemes the children and grand-children will not be so lucky. Indeed, some parents may choose to blow some of the money on a new car.
When “Pensions Freedom” was introduced three years ago the, then, Pensions minister Steve Webb said it was: “People’s “choice whether to buy Italian Lamborghini sports cars.” Of course he was correct. Why not? Take my (fictional) friend Freddie. He is fifty-five years old, children are all grown up, mortgage is nearly paid off and he has a decent income. He has no idea when he will stop working and already has about £400k in his SIPP plus a bit of defined benefit pension from a previous employer.
To say Freddie is a “petrol head” would be an understatement but his current car is a relatively sensible BMW M4 convertible. However, he has just seen his dream car in HR Owen. He told me all about it. “It’s a 2006 Lamborghini Gallardo Spyder with 19inch 5 Spoke Alloy Wheels and a Grigio Roof. This means that you can listen to that 5.2-litre V10 with the hood down. Somehow, being able to hear it so much more clearly actually intensifies the thrill. The raw numbers say the Spyder is fractionally slower than the coupe at 4.0sec to 62mph and 201mph flat out. But that’s purely because it weighs a wee bit more. I must buy it!” I told him that of course he could buy it; provided he was prepared to make some sacrifices; such as going without his regular Americano from Starbucks on his way to work and on his way home. He looked at me as if I was mad. I suggested we do some sums. The dream car was for sale for £89, 950. He reckoned he could get £30K for his BMW. So, he needed to raise £60K. I told him he could take it out of his SIPP.
Reducing his SIPP by £60K would mean that in a 4% drawdown model his retirement income could be reduced by £2,400 a year. After tax that would be about £1500 which is about £125 per month; say £4 a day – exactly the cost of the two Americanos! Clearly, this is a tongue in cheek example. And, of course, I would have told my fictional friend to talk to his financial adviser. But the point is that Steve Webb’s analogy remains pertinent in a world of single digit returns. And, who knows? The classic Lamborghini might appreciate over time and will provide more fun and possibly better performance than some investment funds!