Personal Finance: Plans to maximise lump-sum savings

Money makeover

THE MAKEOVER

Name: Patricia Willmot

Age: 57

Occupation: Call co-ordinator for a large company

The problem: Pat recently inherited about pounds 30,000, which she has placed mostly in bank or building society accounts. She also has shares from Halifax and share options from her work worth pounds 20,000. After planning for potential emergencies she wants to invest her surplus funds, which include bank and building society deposit accounts, in the most useful way possible.

The solution: A reserve fund needs to be set aside. Thereafter, it makes sense to sell the shares and use this money, plus whatever is left from the inheritance, to diversify into other collective investments and spread her risk.

Patricia Willmot is divorced with two grown-up daughters. She has worked for her employer for 19 years and currently earns pounds 34,700 a year in a senior administrative role which provides her with private healthcare, a share option scheme and a final-salary pension scheme with a retirement age of 65. Pat would like to work until 65, but is worried a merger of her company lead to her being made redundant.

In addition to her Halifax shares and share options, plus her deposit accounts and pounds 3,000 in a Tessa, Pat is paying pounds 178 a month into a Halifax personal equity plan (PEP), and two with-profit endowments with Standard Life, set to mature in 2002 and 2007. Her home is valued at pounds 100,000, on which she has a mortgage of pounds 66,000 on a three-year discount which she is part-way through. She is fairly risk-averse.

To protect herself (and the mortgage) against the threat of illness, Pat pays pounds 188 a month for a critical illness policy which would pay out pounds 66,000 in the event of her suffering one of a range of serious illnesses.

The adviser: James Bruce, an independent financial adviser who is a member of the Institute of Financial Planning and the Society of Financial Advisers. His company, Corporate and Personal Planning, is based at Highwoods Square, Highwoods, Colchester, Essex (01206 841176).

The advice: Pat has several objectives. She wants to establish an emergency fund and would like a new kitchen in her home, which might cost up to pounds 10,000. She also wants to review her existing investments and invest any other surplus as appropriate. A review of her expenditure shows she might have pounds 100 or so available for regular investment each month.

Generally, the size of emergency funds one has is up to the individual, although I regard three months' expenditure as a suitable guideline. In this instance, I would suggest pounds 5,000 and would recommend this money is placed in a C&G postal account, which offers a competitive rate of interest.

As for the kitchen, as Pat can plan ahead she can afford to tie up the funds in a notice account, which should give her a higher rate of interest. On balances of pounds 10,000, Halifax pays a gross rate of interest of 7.3 per cent (Source: Money Facts, April 1998). A marginally higher rate of interest, currently 7.9 per cent gross, is available from Northern Rock's Select 90 account.

Providing for the emergency fund and the planned expenditure has taken pounds 15,000 of the pounds 26,850 on deposit. This leaves pounds 11.850, plus a further pounds 19,842, the value of Pat's direct equity holdings. She could use part or all of this to pay off some of her mortgage. But this could incur heavy redemption penalties.

Therefore, it makes sense to think in terms of investments. Her shares have been acquired by chance and do not really offer a reasonably diversified, actively managed portfolio. We typically recommend people achieve these two aims through collective investments such as investment trusts.

Therefore, my advice to Pat would be to dispose of her existing Halifax and company shares. She should then top up her contributions into her Halifax PEP, with a payment of pounds 3,864, to maximise her current year's allowance of pounds 6,000.Then, I would suggest placing pounds 1,800 into Pat's Tessa, to maximise her Tessa allowance.

This leaves a balance of about pounds 26,000. My advice would be to look at fixed-interest funds for about pounds 12,000 of this money. A good fund for this would be Exeter's Zero Preference unit trust, which aims to produce steady capital growth with minimal risk. In the past five years it has achieved returns of 9.1 per cent.

I would then recommend that about pounds 8,000 be placed in managed funds, which will provide a balance of fixed interest and equity-based exposure. The Framlington Managed Distribution unit trust aims to combine an above- average level of income with long-term capital growth.

The current split of the fund means a majority is invested in UK equities, with the balance in fixed-interest securities and cash. Over the past three years it has achieved annualised growth rates of about 13.4 per cent, with income of about 4.2 per cent a year. However, this money can be reinvested until an income option becomes necessary later on.

Finally, I would go for a direct equity fund. Gartmore's British Growth unit trust focuses on top-notch UK equities. Typically, blue chip stocks make up about 70 per cent of Gartmore's portfolio. Again, the performance of this fund has been above-average in its sector for several years. My advice is that pounds 6,000 be placed in this fund.

My recommendation is that the last two investments be placed within a Skandia MultiFUND wrapper. Skandia is an insurance company which offers a choice of about 100 funds from 11 large companies. It also offers six- monthly valuations, annual income reporting, a freephone desk and helpline.

There are extra charges levied by Skandia for this service, on top of the annual fund management fee. But for someone who might be seeking regular reviews and active management - that is, the option of switching from one fund to another to maximise out-performance and minimise poor returns, Skandia's option involves no charge for switching, save any bid- offer spread, on which a discount has usually been negotiated.

Pat says she can save pounds 100 a month. My suggestion is that the money be divided equally between Newton Fund Managers Income and Jupiter Fund Managers' European unit trusts, to achieve even greater fund diversity. Again, these funds have delivered consistent above-average performance. Here, too, I would advise the investment take place under the Skandia wrapper.

Lastly, Pat indicated that she pays pounds 188 a month for her critical illness policy with Halifax. I would suggest that a term-based policy, linked to the number of years she has left on her mortgage, would be much cheaper. A similar critical illness policy with another provider for nine years, when her endowments mature, could cost as little at pounds 66 a month, a considerable cost saving.