Comfortable enough to enjoy retirement

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Indy Lifestyle Online
Name: Edward Johnson

Age: 74

Occupation: Retired research chemist

The problem: When Mr Johnson retired nine years ago, he gave half of his retirement lump sum to his wife to invest as she pleased. She chose to invest in a balanced portfolio of unit trusts, PEPs, National Savings bonds and deposit accounts.

Mr Johnson invested his capital in a portfolio managed by Nat West. He invested pounds 60,000 in 1988 and even though he withdrew pounds 5,000 in 1996, the portfolio is worth only pounds 69,000 (pounds 45,000 in shares and pounds 24,000 in PEPs). He is concerned that the portfolio is not performing well. While he received pounds 586 in income in the past six months, the capital value fell by pounds 1,544. Mr Johnson has an annual index-linked pension of pounds 15,000 and he and his wife have full state pensions. They live comfortably on this income and so the provision of extra income from investments is not so important.

The Johnsons also have pounds 4,000 in a current account earning no interest. Mr Johnson wants to make the most of his available capital, living comfortably and leaving some of the couple's assets to their two sons.

The adviser: Julie Lord, managing director of Cavendish Financial Management, Summit House, Windsor Place, Cardiff (01222 665588). She is also chairman of the Institute of Financial Planning, the professional body for financial planners.

The advice: Mr Johnson's portfolio should be redesigned to concentrate on growth only. If he needs more money in the future he can always sell shares or units to provide funds. This will allow him to make use of his Capital Gains Tax (CGT) allowance of pounds 6,500 per year to obtain tax-free growth.

This may not be necessary as he already has pounds 19,000 in deposit/current accounts and does not see the need for large cash sums except for holidays which are planned in advance. Four thousand pounds is too much to keep in a current account. I recommend that part of this capital is reinvested when his portfolio is reviewed. The balance could be placed in a high- interest paying current account.

I suggest the Johnsons co-ordinate their portfolios a little more closely. Mr Johnson's portfolio is too small to be invested in direct equities and there seems little value in paying annual management fees for only a small number of different holdings which are changed infrequently. Better value and performance might be achieved by consolidation.

PEP allowances should be maximised for both of them before 1999 so that any returns they do receive in the future are tax free. Deposits should form the foundation of the overall portfolio, with well-performing, consistent unit and investment trusts generating the growth.

Mr Johnson asked about the suitability of tracker fund investments. These follow share movements in the FTSE 100 or the All-Market share indexes. I don't think this would be inappropriate for part of his portfolio, but I would caution him about being too bullish, as indices can fall dramatically.

The Johnsons would like to leave their estate to their sons rather than to the taxman. Their house is worth pounds 160,000 and total assets pounds 322,000. They have left everything to each other in their wills and so the inheritance tax liability on their estate is approximately pounds 43,000. Both have nil rate bands of pounds 215,000. Rewriting their wills will ensure that both allowances are utilised and thus assets to a maximum of pounds 430,000 can be passed to the beneficiaries free of inheritance tax.

If Mrs Johnson dies before Mr Johnson, he will manage financially because he will have his pension income and all the capital investments. However, if Mr Johnson were to die first, I cannot be certain that Mrs Johnson would be comfortable on only half Mr Johnson's pension and the income from the portfolio. I would like to produce a cashflow analysis of this situation to ensure that, whatever happens, both of them will remain financially secure for the rest of their lives.

The only other event that coulddestroy the Johnsons' long-term financial security would be if they required nursing care. This can cost between pounds 18,000 and pounds 25,000 a year each and would affect their available capital very quickly.

The Johnsons could set aside a fixed amount of capital to pay the costs in the future should they ever be needed, they could insure themselves against the risk, or they could discuss the matter with their sons, who might insure the risk in return for a safer inheritance.

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