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Financial Makeover: Reality of a dream cottage


AGE: 56


Anne is part-time office manager in a surgery in Oxford but would like to give up work. Fortunately, she recently inherited money which makes her plan more feasible. She and her husband George have a mortgage for pounds 25,000 on their property which has 12 years to run.

Anne also has a car loan for pounds 6,000 to be paid back over three years. She has built up a number of investments through the Bradford & Bingley including insurance bonds, PEPs, ISAs and shareholdings.

Anne really wants to buy a weekend cottage in Dorset at around pounds 60,000, leaving her pounds 36,000 to invest.

The adviser: Tim Cockerill is managing director of White- church Securities, an independent financial adviser in Bristol. Telephone 0117 944 2266.

The advice: Anne has two distribution bonds, held jointly with her husband, one with Sun Life and one with Allied Dunbar. The Sun Life bond has been held for a long time and this has produced a very respectable return. They have not drawn income from it, but if Anne gives up work, they will have to consider taking 5 per cent a year from the bond.

This income is paid monthly after tax. The Allied Dunbar bond is a more recent investment and should be left it to grow until a 5 per cent income if needed.

Anne also has a PEP with M&G in their Extra Income unit trust. Anne should take the tax-free income.George also has a PEP with INVESCO in their UK Income & Growth trust. Unfortunately this investment hasn't been good and I would recommend switching to the INVESCO Income unit trust which has been considerably better.

Anne's car loan is costing her pounds 158 per month, and it would make sense to repay this, which means her investments need to produce less income. And she could consider repaying the mortgage.

The outstanding pounds 25,000 is costing pounds 1,500 a year. This is the equivalent of making an investment for pounds 25,000 paying out 6.24 per cent net for 12 years.

Crucial to this exercise is to ensure that the endowment policy payments are maintained, because in 12 years this will produce around pounds 25,000, which can then be invested for income.

If Anne repays her car loan and mortgage she saves herself pounds 290 per month. Her salary is pounds 400 a month which means she would have a shortfall (pounds 400 minus pounds 290) of pounds 110, which is roughly pounds 1,300 per annum.

If she takes an income from the Sun Life Distribution bond of 5 per cent and the income from the M&G PEP this will generate an income of approximately pounds 1,500. It would also leave her with pounds 5,000 spare which could be invested for growth.

But this money could be put into a high-quality equity income unit trust, such as Newton Higher income. I expect the Newton fund to perform well, generating capital growth and a growing income over the years.

In summary, Anne can afford to give up work and purchase a cottage in Dorset. She needs to check out the small print on the car loan carefully and have a serious think about paying off the mortgage.

If she decided she did not want to pay off the mortgage then the pounds 36,000 can be invested for income, which should generate sufficient to meet any income shortfall through giving up work.

Alternatively, the mortgage could be paid off and Anne would still be able buy her cottage and give up work.

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