Personal finance: Financial Makeover - Money without tears
Financial Makeover: NAME: PETER LORD AGE: 48 OCCUPATION: SELF- EMPLOYED COMPUTER CONSULTANT
Saturday 06 February 1999
His home has no outstanding mortgage. Peter has managed to save and build up capital in various building-society accounts. The majority is held in the Cheltenham and Gloucester Instant Transfer Account, which pays a competitive interest rate with instant access.
Some of the remaining accounts were opened to benefit from carpetbagging. In addition to this, Peter has a Tessa with Birmingham Midshires; this account has been earmarked for a future project.
He also has pounds 2,500 invested in National Savings Premium bonds, but returns have been disappointing. His only investment into equities is 167 shares in Eurotunnel, his reason being that he was born in Folkestone.
In the past, Peter's experience in investment has been disastrous. In 1983 he bought 14 Krugerrands at about pounds 290 each, and eventually sold them 10 years later for about the same price. In August 1988 he purchased a share in a flat for pounds 15,000 and subsequently sold it in August 1991 for pounds 8,000, a loss of some pounds 7,000.
Peter wants to improve on the returns he is currently receiving from his building society, and to maximise his future retirement income.
Bryan Bull is an associate director with the Aitchison and Colegrave Group, independent financial advisers, Suite One, Berkeley House, 15 Hay Hill, Mayfair, London W1X 7LG (0171-499 0990).
Peter opened a regular contribution personal pension contract in 1984 with Sun Alliance, now Royal and Sun Alliance, investing in the traditional with-profits fund. In 1987 he invested a single contribution of pounds 2,000. These contracts are the old-style "retirement annuity contracts" and have a guaranteed fund value at normal retirement age of 65 and also a guaranteed annuity rate.
With current annuity rates at an all-time low and interest rates looking as though they will fall further, this is a valuable option.
The existing pension contract should be maintained at its current funding level (pounds 450 per month) in order to take advantage of the valuable guaranteed future fund values and the guaranteed annuity rates (pounds 10.93p per annum per pounds 1,000).
Additional single premiums should be made annually to take advantage of personal pension legislation allowing higher contributions to be made. At Peter's age, 48, up to 25 per cent of net relevant earnings can be paid in, as opposed to 17.5 per cent under his existing retirement annuity contracts. This will offer Peter the opportunity to diversify his investment and offer greater flexibility in the future.
I recommend a single contribution of pounds 7,000 gross to the Scottish Equitable Personal Pension contract selecting the Global fun, which invests in a wide range of world-wide equities, predominately in the UK and Europe. As Peter is a higher-rate taxpayer this will reduce his tax bill by pounds 2,800. He could also utilise carry back/carry forward provisions for underpaid contributions in previous years, further cutting his tax bill.
Peter's Tessa was set up three years ago with Birmingham Midshires Building Society, making maximum contributions, and these should be maintained until maturity.
With regard to Peter's building society deposits, many should be maintained in order not to prejudice any potential windfalls. However, interest rates continue to fall, and we have already seen bank base rates fall from 7.25 per cent to 6 per cent per annum over the course of the last few months. Accounts with societies that are not likely to demutualise should be closed and the proceeds reinvested.
Peter has indicated that he would be prepared to invest a proportion of his capital into asset-backed investments adopting a balanced attitude to risk. He is also interested in an exposure to Europe.
As Peter has no other equity investments (apart from Eurotunnel) my recommendation would be to invest pounds 6,000 into a unit trust personal equity plan with Jupiter. The money should be split equally, placing pounds 3,000 in the Income fund and a further pounds 3,000 in the European fund.
The Jupiter fund invests in a wide range of UK equities and since its launch in 1987 has achieved consistent first-quartile ranking, which means that it has always been within the top quarter of funds in its sector. The European fund invests in a wide range of equities from the European community, and has also managed to achieve consistent first-quartile ranking.
As personal equity plans will be replaced by Individual Savings Plans (ISAs) on 6 April 1999, Peter should consider a further investment of up to pounds 7,000 in three months' time, to achieve greater diversification.
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