Personal finance: Minding her business
Financial Makeover: NAME Sue Grossman AGE 34 OCCUPATION Runs Blue Ribbon Events, a Corporate And Hospitality Agency
Saturday 15 August 1998
Over the past few years, Sue has built up a small portfolio of individual company shares, including BT, Abbey National, Lloyds TSB, Railtrack, Rolls Royce and Thomson Holidays. The shares are now worth about pounds 25,000. She also holds about pounds 30,000 in an instant access account with Direct Line, paying 7.05 per cent gross, and has a separate account with Standard Life Bank, out of which she conducts her business finances.
So far, Sue has ploughed almost all her earnings back into the business and intends to sort out her pension planning and other financial areas on its first anniversary next month.
The adviser: Roddy Kohn, independent financial adviser at Kohn Cougar, Wellington House, Wellington Park, Clifton, Bristol, BS8 2UR (0117-946 6384).
The advice: For the past year, many of Sue's personal finances have had to take a back seat,allowing her to concentrate on setting up and establishing her business. There are now areas where planning would come in useful.
Sue already has a term assurance policy with Norwich Union for pounds 20,000, so in the event of her death all her debts will be wiped out. This is tax effective because it is linked to a personal pension, thereby enjoying the same tax benefits from the Inland Revenue as with a personal pension. Out of every pounds 10 paid into a policy in this way, the Revenue chips in pounds 2.30 for standard rate taxpayers and pounds 4 for those on the higher rate.
Perhaps one of the most important issues is whether any debts could be covered in the event of long-term illness. Sue has some capital set aside from Blue Ribbon Event's earnings. But long-term illness would eat into this.
It is clear, however, that additional critical illness cover of pounds 150,000 will be needed. Critical illness cover, which pays out a lump sum in the event of diagnosis of major diseases, including heart attacks or cancer, would go some way towards resolving this issue.
Should anything happen, she could simply choose to use the capital to repay her mortgage or any other liabilities. That's the attraction with critical illness cover; it can be used in any way Sue sees fit. This will cost in the region of pounds 25 per month through Scottish Provident.
I also have recommended that Sue take out permanent health insurance. This pays a regular income in the event of a person being off work for a long-term period for any reason. I suggest Friends Provident because this will provide an income equal to approximately half her current salary at a cost of pounds 28.71 per month.
Premiums and benefits are fixed at the outset which means Sue need not worry about rising costs in the early years. She will need to review the contract at least every three years to inflation-proof her benefits.
As far as pension planning is concerned, I originally advised Sue to sit tight for at least nine to 12 months before making a pension contribution. This is simply because we need to be sure that the profits from Blue Ribbon Events are sufficient to justify making the contribution.
Bearing in mind that the Inland Revenue allow the self-employed up to seven years to catch up with pension contributions, Sue need not be concerned about a short-term deferment of her plans. In any event when Sue's personal pension does begin, she will need to include waiver of premium cover, which continues to pay contributions into the scheme in the event of illness.
She also will need to look for the most flexible pension possible, one that allows for large lump sums to be paid in as well as regular contributions, but does not penalise savers for altering the payment level from time to time, as their earnings fluctuate. There are several companies on the market offering such products and we can discuss the benefits of each when Sue is ready to plan her contributions.
The existing pension-term-assurance contribution is sufficiently small so as not to cause concern.
When Sue starts a personal pension is it unlikely she will be in danger of paying in too much, and thereby forfeiting any tax breaks, as her current maximum contribution limit is 17.5 per cent.
Sue's cash deposits are earning reasonable rates of interest, be they with Standard Life Bank or Direct Line. If she wanted to rationalise the accounts and earn a marginally higher rate of gross interest, it would make sense to switch all the money to Standard Life Bank, which currently pays 7.35 per cent a year on deposits of more than pounds 1. Sue knows this. The key question is will Sue decide to move the money?
As for her investments, there is no doubt that Sue has done well with her share portfolio over the past two to three years.
It is sometimes difficult to re-examine things when they have proved to be such a success. Again, however, there is an underlying problem, as with most portfolios of this size, that the number of shares she owns exposes her to greater than normal risks in the event of market downturns.
As we have seen in the past week or so, this is not an idle risk: the truism about the value of shares is that they can go down and up. In such cases, I believe investors should take shelter by maximising the spread of their holdings as much as possible.
Doing so by simply dividing the portfolio into smaller units would not be economically sensible. That is why it often makes sense to look at "packaged" investments, such as unit and investment trusts, which by holding shares in a greater number of companies, helps reduce risks. Again, I have indicated this to Sue. Should she feel that she is ready, I would be happy to look at a suitable portfolio to match her needs.
Whilst these are not all the issues Sue will need in addressing the financial makeover of her business they certainly represent the most pressing ones. She has done exceptionally well in the past year. It is now up to her to take the next financial steps to help secure her future.
Blue Ribbon Events: 0171-609 7400
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