She has shares, PEPs, deposit accounts and three different pension schemes. In addition, she has surplus income of pounds 100 per month which she wishes to invest. Charmayne expects a pounds 15,000 loan made to a relative to be repaid shortly. She would not mind taking a slightly higher investment risk with some of her savings, but would prefer the majority to reflect a fairly balanced and conservative portfolio.
The adviser: David Holland, managing director at RK Harrison Financial Services, independent financial advisers, with offices throughout the UK (0171 929 9300).
The advice: There are a number of issues to address. First, Charmayne needs to look at her pension planning. Currently she puts pounds 170 per month into her pension plans, with a further pounds 80 per month being contributed by her employer into a company scheme in respect of her non-freelance earnings. This is 7.5 per cent of her total income.
If we project forward at reasonable growth rates for both her existing pension funds and continuing contributions, Charmayne's pension fund would be approximately pounds 275,563 at age 55, or pounds 445,911 at age 60. Using these funds to buy a single life annuity, with payments made monthly in advance, guaranteed for five years and escalating in line with the retail price index up to a maximum of 5 per cent per annum, would provide her with a pension worth about 14.26 per cent of her income prior to retirement at 55 or 19.88 per cent at 60.
She needs to contribute more towards her pension. Someone of her age is allowed to contribute up to 17.5 per cent of net relevant earnings in the current tax year into a personal pension and 15 per cent into the company scheme. She should think about doing so.
When the pounds 15,000 loan that she has made to a member of her family is repaid, we would recommend that she makes a pounds 2,195 contribution to a pension policy. Once the provider has reclaimed basic rate tax from the Inland Revenue she will have a gross contribution of pounds 2,850 invested. She would also receive higher rate tax relief on the full contribution amount resulting in a further refund of pounds 484.50.
Charmayne has already invested pounds 1,000 in a 1998/99 general PEP with Perpetual, and we would recommend that she uses the remaining pounds 5,000. Perpetual has a range of funds to choose from, but now that the UK stockmarket represents slightly better value we would recommend the Perpetual High Income fund which invests in UK equities and fixed interest securities. Over the past three years it has grown by 19.02 per cent per annum, while the average fund which has grown by only 16.13 per cent.
The remaining pounds 7,805 should be split between the Close UK Escalator unit trust and the Fleming Claverhouse investment trust. The Escalator fund aims to track the performance of the UK market and to provide a capital guarantee equal to 95 per cent of the value of the investment each quarter. This means that your investment cannot fall by more than 5 per cent during a quarter. Gains made during the quarter are locked in at the end of the quarter and the new 95 per cent level set.
Over the past year the Claverhouse fund has grown by 40.30 per cent, compared to the average fund which has grown by 28.33 per cent. Over the past three years it has grown by 29.01 a year, compared to the average fund which has grown by only 17.5 per cent.
Charmayne could add to these savings by putting pounds 60 per month into the Henderson Investors Electric & General Investment trust. This fund has a broad spread of international investments and would allow her to invest money regularly into the stock market, while reducing risk by "pound-cost averaging". Over the past year Electric & General has grown by 28.75 per cent, compared to the average fund which has grown by 15.33 per cent.
Charmayne has just over pounds 12,000 invested in the shares of BT, Lloyds, Hyder, Northern Electric and National Grid. They reflect a moderate- risk portfolio. The three utilities are a safe haven against the strong pound and weakness of the Asian markets and are good defensive stocks. They are still trading near all-time highs.
Lloyds is a preferred share within the banking sector and has shown a market-leading return on equity and excellence in controlling costs. We consider them to be a core holding for most portfolios. We are also very keen on BT shares, particularly since the announcement of its joint venture with AT&T.
We would not recommend any changes other than to sell pounds 3,000 of BT shares and reinvest the proceeds into a single company PEP. This will shelter future income and gains from tax. The single company PEP offered by Killik and Co is competitive with no initial charge and, importantly, no management charge.
When Individual Savings Accounts (ISAs) become available next year, Charmayne could consider investing some of the remaining shares into these accounts in order to continue to protect her investments from tax.
As a single person, Charmayne relies upon her own income to meet the cost of her living. We therefore believe it is sensible to obtain private medical insurance which would allow her access to any medical treatment should it be needed. The Prime Care Super Saver policy offered by Primehealth would provide comprehensive in-patient treatment for pounds 20.64 per month.
As for Charmayne's instant-access cash savings, the best rate of interest currently paid by First Direct, with whom she has pounds 3,000 invested, is 5.25 per cent gross. We suggest she switches to the Cheltenham & Gloucester's Instant Transfer telephone-operated account which pays 7.5 per cent gross for balances above pounds 1,000. It has remained competitive and is simple to use.