The financial life cycle of a professional footballer - Planning for retirement

In this two part article Sam Sloma, Anna Moore and Robin Charrot chart the financial life cycle of a footballer and suggest some financial and legal ways to help players protect their wealth. In part 1 the authors plotted some of the ways young players can protect their wealth at the early stages of their career. In part 2 the authors outline how football players can protect their wealth by planing for retirement.

Planning for retirement

After a player has bought his first property, what is likely be his main residence, and is earning what may be considered a “good income” as he moves into the peak years of his career, attention turn to other aspects of his life such as investments, pensions and protection of assets.

Prior to April 5^th 2006 (A Day) professional footballers were allowed to take their pension benefits at the age of 35.¹ This was ideal for footballers as they would often need the funds built within their pension when the income from football declined. However, the retirement age is now 55 and it can be an awfully long way away for a young man of under the age of 25.

The annual personal allowance is currently £40,000 (tax year 14/15) and every member of the Football League gets £4,750 per year from the PFA for each year were under contract.²

This means players can place £35,250 per tax year into a pension. The actual contribution needed to max out this contribution is £28,200 (as the government will give them the £7,050 difference in tax relief). This then equates to a saving of £2,350 per month net. They will then be entitled to a rebate in tax for the additional 20% or 25% depending on their earnings.

For those earning £20,000 per month net of tax or over this shouldn’t be a problem. This figure provides for a large monthly mortgage repayment, one or two cars, bills etc. Therefore they may only have approx. £5,000 left per month to save.

However what proportion of savings would you want to allocate to age 35 and how much to age 55? Bearing in mind the players cannot touch the pension funds and, as stated previously, at the age of 35 any earnings will be significantly less than their football earnings.  This is when a player will need the money the most. Therefore it is not wise for a player to tie all their savings up until age 55. It is sensible for players to plan to save for the medium term (to age 35) and for the long term (age 55).

£5940 of this can be put into a cash ISA and the rest into stocks and shares or the full £11,880 into stock and shares fully. This is rising to £15,000 on July 1^st 2014.

Sensible players maximise their ISA allowances every year. If they are married they can use their wife’s allowance if they are already maximising their own allowance. Quite quickly they can build up tax free sums that are readily available should they need them.

If growth can be kept to under £10,900 there is no tax to pay. Every year a player can take out the £10,900 and place it a ISA.

This means the ISA contribution will come from tax free money, which is extremely tax efficient.

As mentioned previously, professional footballers typically love property and after purchasing their main residence they often start purchasing buy-to-let properties. Financial institutions are more willing to lend footballers money over a longer term for buy-to-lets conditional on their income covering the rent plus 25% (approximately).

Elite professionals with earnings in the upper echelons of football and buying multiple properties should consider buying through companies. Any money withdrawn can be taken as a dividend which is more tax efficient than paying at their marginal rate of 45%. If no money is withdrawn, only corporation tax is payable at 20%. Directors can also pay someone, in some instances a family member, to manage their portfolio through the corporate structure.

The major issues for a player are the same as with buying a main residence: the effective management of the properties. There have been instances where players have bought properties that have been left empty for three months, meanwhile the player is still paying for utilities. Whilst this may not be considered “big money” if a player has three or four properties, it can still accumulate into an significant amount of expenditure being paid on an empty flat.

The perception of property portfolios is that they are easy to build. The reality is that it is very difficult for a player to manage unless they have a team around them and good organisational skills. Players also need to think of tax implications on their income and should always inform their accountant as mistakes can lead to costly fines from HM Revenue & Customs.

It is estimated that around 33% of professional footballers get divorced within one year of retiring from the sport⁶. In most divorces where the footballer is not protected by a pre-nuptial agreement (or ‘prenup’), the footballer can normally expect to pay around half of all of their capital to their wife, and a significant chunk of their future earnings. This year, the Russian owner of French club Monaco FC has been ordered to pay a record-breaking £2.6 billion to his ex-wife in a divorce settlement7  while ex-Premier League midfield Rafael Van der Vaart divorced his wife of 8 years in 2013 in a multi-million pound case⁸. The most high profile divorce case in recent years however involved that of Ashley and Cheryl Cole, with Cheryl Cole reportedly receiving £4.5million from the settlement⁹.

A growing feature of society in general and in professional sports is the prenup agreement. UK law does recognise them¹⁰, and although the divorce court has the ultimate say on how finances will be split on divorce, a well drafted prenup which meets the wife’s reasonable needs will have heavy influence over the court’s decision.

Ideally the prenup should be signed at least four weeks before the wedding and the negotiations should start with lawyers on both sides, a few months before the wedding.

Prenups do not state, ‘I’ll keep all of my money and you’ll have nothing as I’ve earned everything’. They are about protecting certain assets, or setting a much lower limit for capital and maintenance payments than the divorce court would use. They provide certainty and security to the player and their wife. They are about finding a solution when the relationship is good and both partners are happy and will be reasonable with each other.

If there is no prenup, and if a sportsperson or his wife were caught cheating, it could (quite rightly) cause a large degree of hostility. Trying to sort out division of assets and payment of maintenance when both sides are very angry will be  far harder.

The cost of a prenup is dependent on the complexity of the situation but it will always be far cheaper (far less than a tenth) than the cost of dealing with finances on divorce if a couple does not have one.

If the player was married before they had any significant money, and they do not have a prenup, they should consider a postnup, which provides the same function as a prenup. 

Introducing the idea of a prenup or a postnup is not romantic, and not very easy. However, there are ways of doing it which will not cause offence. Lawyers who are specialists in this area can advise on how to successfully ‘sell’ the idea of a prenup or postnup.

If the player doesn’t marry but lives with their girlfriend, or even if they don’t live together but they have children together, there are still very significant financial claims that the player could be exposed to if the relationship breaks down.

A cohabitation agreement has the same influence as a prenup or a postnup and plays the same role (limiting claims against the player, providing financial security for their girlfriend). The cost of a cohabitation agreement will also be far less than the cost of reaching a settlement after the relationship has broken down.

A Will is a very important document. It dictates who the deceased’s estate is left to and how it is divided as well as who will have responsibility for managing the assets both immediately after death but also often in the longer-term. As with the pre and post nup above, it is imperative that professional advice is sought about putting in place a Will.

If a person dies without a Will, there are set rules which dictate who will get what¹¹.  If the deceased person has a spouse he/she would get everything but if the person was not married to their partner, he/she will get nothing.  If the deceased had a spouse and children, the spouse would get the personal belongings, a lump sum of £250,000 and half of the remaining assets (from October 2014, following a change in the law)¹².  The children would get the other half of the remaining assets once they became adults.  If the deceased does not have a spouse or children, the deceased’s assets would pass according to a set list set out by law.  The parents would take everything if they are alive and, if not, the brothers and sisters and so on, to the more distant relatives if necessary.  There is no flexibility in these provisions and the deceased’s estate may not pass according to their wishes.

If a person takes proper advice on an appropriate Will, this document can not only make sure that the correct people benefit under the Will but can also deal with the following:

• Who should administer the estate?
• Who should act as guardians of any children?
• Who should receive personal belongings or any cash gifts?
• Any funeral wishes?

A Will can be very simple but it is worthwhile considering whether a more comprehensive Will would be advisable to protect the assets in the long term.

A Will can also include provisions to protect wealth, often by the use of ongoing trusts.  An individual could grant their spouse an automatic right to income (with the option to give him/her lump sums of capital in the future) but in the meantime, the capital is protected for the children or other beneficiaries.  If the individual is making provision for children, a trust could ensure that they receive their ‘share’ at an appropriate age rather than automatically at a set age (usually 18, 21 or 25).  Provision could be made for a partner, while making sure that some of the wealth is preserved for the individual’s family. 

A couple of examples show how this protection can work in different ways:

Example 1

A young wealthy footballer marries and has two children.  He unfortunately passes away in a motoring accident and his Will leaves his entire estate to his wife.  She remarries a few year later and has another child.  On her death, her estate passes to her new husband, who eventually passes most of the wealth to his own child rather than to the two children of the footballer.  This could have been prevented had the wife only been given a right to income, with the capital of the footballer’s wealth protected for the eventual benefit of his own children.

Example 2

Another wealthy footballer marries and has two children.  He dies at a time when his children are 16 and 17 and he has no will.  Under the intestacy provisions, his two children are entitled to a proportion of his estate automatically when they reach the age of 18.  One of the footballer’s children reaches the age of 18 and receives her share.  It is clear to everyone that she is far too young to manage such a large amount of money but the law doesn’t allow for her entitlement to be postponed.  She has a great time spending her money over the next few years but has little left by the age of 30 and no steady job prospects.  If her inheritance had been put into a trust structure, the assets could have been preserved until such time as she was mature enough to handle them on her own, while being used for her maintenance in the meantime.

Players can cover themselves for an injury that ends their career. As with any insurance policy it can appear to be a waste of money until the day you need it and then it is the best thing you’ve done. All players should ensure they are adequately covered.

The policies take medical reports from club doctors and analyse the risk on pre existing and previous injuries. Generally a policy will allow two years’ worth of rehabilitation treatment before a player can decide, on medical advice that he won’t be able to continue with his career.¹³ Payments are made free of tax to the player and can help a player to continue a career during life after football.

Players have a death in service benefit of up to 5 x salary up to £1m under the standard contract. Sensible footballers take out life and critical illness insurance policies as soon as they begin to hit their cycle of peak earnings.

Life insurance pays out a tax free sum to named beneficiaries if something were to happen to the insured. Critical illness cover does the same if the insured were to have a serious illness. They usually run to 55/60/65 and are there to pay a mortgage if someone were to pass away prior to it being paid off.

With life assurance, rather than leaving funds directly to the individuals who are intended to take the benefit, it is often good planning to direct the policy proceeds into a fully discretionary trust.  The terms of such trusts can be very flexible, with players able to choose a body of individuals (the Trustees) to manage the funds on behalf of the beneficiaries.  The funds can be available for the use of the chosen beneficiaries in a variety of flexible ways but in the meantime, the funds are not added to their estates for the calculation of inheritance tax.  Crucially the use of a trust structure can also provide valuable protection against issues such as remarriage (for a spouse or partner), divorce and/or financial weakness or inexperience.  A trust can be brought to an end if it isn’t needed but can be very valuable in certain circumstances.

Critical illness policies differ from provider to provider. It is important that advisers check policy wordings and make sure clients are going for the most comprehensive cover, rather than the cheapest premium.

The premiums are paid monthly and are calculated out on mortality and morbidity rates respectively. The health of the individual and immediate family members is also taken into consideration.

Usually young, fit, professional athletes can get cover for extremely low premiums. These are level in cover and so if a player takes out cover at a younger age, the premiums will remain low for the lifetime of the policy.

Players can always get additional cover in later years but there will be no point in cancelling the cheapest policy. This is a good planning tip.

The level of wealth accumulated over a player’s career influences their needs for income in retirement. Extremely few ex-professional footballers have become successful TV pundits or managers, although many would like to.

The agent, manager, lawyer, financial adviser are still vital cogs in a retired players machine. Players need to explore options, build a plan, read through contracts, negotiate and look after their assets.

From a financial point of view, cash flow modelling is important. A cash flow model details every aspect of a player’s financial position and can inform on what income needs to be received, what level of tax the player will pay, what return is needed to be generated on the invested funds and how to plug any shortfalls.

It can factor in selling of homes, children’s school fees, holidays etc to really help in the planning process. Without the security of the three year contract, which is familiar occurrence for most players, the need for planning becomes far greater.

Ideally players should aim to build up assets to allow them the time to make independent decisions on their future. The funds built up during a playing career provide players with options to explore new career paths and most importantly secure financial security for them and their families once their profession has ended.