Planning for a healthy retirement

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The Client

CAROL IS is 35 and works for a firm of solicitors with an income of pounds 48,500 pa. She has been with them for two years and expects to stay for the foreseeable future. She owns her own house, worth pounds 160,000 with a mortgage of pounds 110,000.

Last year, an IFA had recommended two personal pension policies amounting to pounds 400 pm, as her company did not provide a scheme. Carol was feeling very settled in her home and work. Her nagging doubts about her apparent financial security centred on "what if it all went wrong?". She wasn't worried about being made redundant, but she was concerned about anything happening to her health.

The Research

We looked into the two pensions and reviewed the charges and the investment performance record, and estimated whether the contributions would be enough to provide her with an adequate income in retirement. We also checked the terms and rates of her savings account.

Our new recommendations centred around income replacement (known as permanent health insurance - PHI) and critical illness benefit (CIB). Carol was not interested in private medical insurance.

PHI policies provide an income if you are unable to work due to accident or illness. One of the most important decisions is about the "deferred period". This simply means how long you have to be off work before the policy starts to pay. Most PHI policies offer deferred periods of 1, 3, 6 or 12 months, the premiums being more expensive the shorter the period.

We also looked into the definition of disability, as this can vary greatly from one plan to the next. The best policies will pay out if you cannot do your normal job.

Finally, we considered whether to recommend reviewable or guaranteed premiums. Reviewable premium policies are cheaper initially, but may be adjusted by the insurance company every five years. You therefore run the risk of having the premium increased. Guaranteed premiums cannot be changed by the insurance company.

At this point it is down to cost - which company can offer the lowest premium, for the type of cover required.

Critical illness benefit usually provides a cash sum, free of tax, if you contract one of a list of serious illnesses - the most common being cancer, heart attack and stroke. When looking at CIB policies you need to look at which illnesses are covered and how the insurance company defines the illness. This can involve technical medicine, but there is an industry standard definition for the main illnesses covered.

As with PHI policies, you also need to consider whether to have reviewable or guaranteed premiums, and then it is down to cost.

Advice

In our opinion, the pensions the IFA had recommended last year were excellent. The contribution level was good, but would not be quite enough to provide Carol with enough at age 65. We suggested that she put in additional lump sums from time to time, and perhaps to increase the regular payments when she next received a pay rise.

We also warned her that she would need to put even more in if she wanted to retire before 65. Her pension planning was more costly, as she had left it fairly late before starting.

Her building society deposit account was one that provided a consistently good rate so no change needed here.

PHI

Carol's employers would pay her for three months if she couldn't work for health reasons. We could have arranged a contract with a three month deferred period, so that PHI would start exactly when her employer stopped paying her. However, with protection policies, we tend to adopt the approach "only spend as much as you need to get the job done". Carol had money on deposit that she could live on for a few months. We recommended a policy with a six month deferred period.

We arranged for the policy to provide pounds 2,000 pm, which she needed to cover her out-goings, and this would be tax-free. The policy would run to age 65 when she planned to retire, and would increase each year in line with inflation.

CIB

We considered PHI to be a higher priority than CIB, because Carol's lifestyle depended directly on her income. However we recommended a sum assured of pounds 150,000 which would allow her to pay off her mortgage and still leave a sizeable amount for other purposes.

Fiona Price is managing director of Fiona Price & Partners (0171-430- 0366)

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