Personal finance: Get the pension sorted - and buy a large diary

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Indy Lifestyle Online
Names: Chris and Rebecca Leftley.

Ages: 45 and 31.

Family: They have a boy of three and Rebecca is expecting a baby in March next year.

Occupations: College librarian and market researcher.

Financial issues: Chris and Rebecca are comfortably off. They live in college accommodation and rent out a house they own in Oxfordshire which they have just had valued at pounds 90,000.

Chris has been offered a job in Fiji with a three-year contract. The pay is good by local standards but less than he is getting in the UK. Rebecca will stop working before the baby arrives and may well not find a suitable job in Fiji.

If they sell the house before they go, they could expect to make a profit of pounds 10,000 to pounds 12,000 to add to their current savings and give them around pounds 25,000 to invest.

But when they return to the UK in three years' time, they would have no home to return to.

If they keep on renting out the house, they would have a home to come back to, but they would not have as big a lump sum to invest.

Chris reckons, on past experience, they would need to set aside pounds 5,000 to meet contingencies, which would reduce the sum they could invest to around pounds 6,000. Which way should they play it?

The adviser: Michael Bell is the principal of Michael Bell & Co, a firm of independent financial advisers based at 7 High Street, Drayton, Abingdon in Oxfordshire (01235 531388).

The advice: The opportunity to spend three years on a tropical island is a dream come true. However, there are always practical considerations which get in the way.

Although your pay will be good by local standards, you will have a shortfall of UK national insurance contributions while working overseas which would affect your pension entitlements, unless on your return, within six years, you can make Class 3 voluntary contributions to restore your state pension entitlement.

Both your own and your current employer's pension contributions will be suspended after December.

The pension company will allow you to hold existing funds in your name and you will be able to recommence contributions once you are earning and paying UK taxes.

A contribution now could be considered as money paid in lieu of contributions to be missed over the next three years. Alternatively, you could make regular contributions to a personal international pension arrangement.

A suitable medical expenses plan offering world-wide cover is essential. You will need to investigate the availability, suitability and cost of obtaining NHS/Social Security benefits locally.

With a young son and a baby due in March, sound local medical facilities are vital. After this, pre-school facilities and your son's educational requirements will be uppermost in your mind.

Your remuneration will not be subject to UK taxes but you will be taxed locally.

Housing: As you are likely to return in three years, I suggest retaining the Oxfordshire property. House prices have increased recently and a sale now could result in having to pay more than expected when you return. You may wish to consider having your property professionally valued prior to your departure and upon your return, as there is potential for capital gains tax liability.

Retaining the property has the advantage of "saving" agency and legal fees. Future buying costs are likely to include stamp duty, too. A good letting agent is vital while you are so far away. Happily, you are already familiar with letting procedures and this locality is well sought after by tenants.

The Inland Revenue can provide a very useful leaflet, IR140, Non-resident landlords, their agents and tenants, telling you about tax and the UK rental income of non-resident landlords.

It describes the tax obligations of landlords, letting agents and tenants. Non-resident landlords can apply to the Inland Revenue's Financial Intermediaries and Claims Office (Fico) for approval to receive their rental income with no tax deducted.

Once rents are received and outgoings are allowed for, you are currently breaking even. Your mortgage is on an interest-only basis, supported by monthly personal equity plan contributions. I suggest changing this to a capital and interest basis as PEP contributions will not be permitted while you are overseas.

Selling the property and investing the surplus funds means you are investing your future house purchase deposit.

As a minimum benchmark, the investment must keep pace with any house price inflation. There is a risk that investment under-performance could jeopardise your future house purchase.

It is very likely that your four-year fixed-interest rate mortgage has an early redemption penalty, which would only add to your costs.

Investment: Details of your existing arrangements, tax situation and perceived attitude to risk are essential before making firm recommendations.

You will be liable to UK income tax if your UK income, after allowable expenses, exceeds personal allowances. Inland Revenue leaflet IR138, Living or retiring abroad, will be useful in this respect.

Your pounds 5,000 contingency fund needs to be held on deposit with reasonable access. It is possible to secure a deposit-bearing account with direct debit/standing order facilities to meet regular commitments.

With the pounds 5,000 mentioned above earning deposit interest, you have pounds 6,000 (less any pension contribution) to be invested to maintain a balance between risk and reward.

I recommend making use of your personal equity plan allowances. While the full taxation advantages may not apply, PEP plans can provide a more economic means of buying and holding collective equity investments.

You can continue to invest in and retain your PEP prior to your departure but not once you are living abroad.

Chris should consider topping up his PEP before departure. The family investment portfolio would also benefit from diversification by Rebecca investing in her own PEP using another plan manager and a different investment sector.

In the recent budget it was announced that Individual Savings Accounts (ISAs) seem likely to either replace or encompass PEPs and Tessas from April 1999.

No rules have been announced to date. Once ISAs are launched we can consider whether it will be beneficial to switch existing investments into this new product. Meanwhile PEPs continue to offer highly beneficial tax-free investment and it makes sense to take full advantage in the time remaining.

With some exceptions, there is no capital gains tax in Fiji.

Income from interest, dividends, etc, is not subject to tax where someone from outside is in employment under a contract of not more than three years.

Depending on the rates offered, this might influence your local savings and investment arrangements but be sure to check on the provider's security before investing.

With all the excitement of planning for a new life, it is easy to forget that things can, and do, go wrong. This is an opportunity to review your need to provide essential protection for all the family.

If you are to hold property in your new place of residence, you should consider making a foreign will for foreign property.

Finally, you will need a good size 1998-2000 diary to make holiday bookings for all your family and friends. Bon voyage!

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