FINANCIAL MAKEOVER: Staying on track at the end of the line

Ashley Butterfield, 57, and his wife, Jane, 47, run tours around India by rail in a specially converted wooden carriage. The business, Butterfield's Indian Railway Tours, is due to close next year after 22 years: Indian railways are modernising and becoming increasingly reluctant to hitch up the Butterfields' carriage.

The couple own their flat in southwest London and also own two other flats that are rented out. Each is worth around pounds 120,000. One of the rented flats still has a pounds 10,000 mortgage outstanding, which is due to be paid off next year with a maturing endowment policy from General Accident. The Butterfields have around pounds 110,000 in savings: pounds 18,000 in tax-free Tessas with Birmingham Midshires building society, pounds 40,000 in premium bonds, pounds 30,000 in a deposit account required as backing for the holiday company, pounds 5,000 in a current account and pounds 20,000 in a building society.

Ashley also has pounds 50,000 in various pension funds and adds a further pounds 500 a year.

The business has produced profits averaging pounds 30,000 a year for the past six years, but there is an estimated pounds 14,000 income tax bill due when it stops trading next year.

The Butterfields have no children or dependent relatives. They want to know how best to run down their assets as they get older while ensuring they maintain their standard of living, costing pounds 15,000 a year, and do not want to leave any property or money at death. They also want to give a set pounds 10,000 a year to an Indian charity.

What a financial adviser recommends:

The Butterfields' assets are such that they have little reason to worry about being able to maintain their standard of living.

While they plan to pack in the tour business, they should hang on to their investment flats. These presently produce pounds 19,000 a year, or pounds 15,000 after agent costs, maintenance and insurance. If the Butterfields put their personal tax allowances against this rental income, they could still walk away with around pounds 13,700 a year net. The rents should keep pace with inflation and should be fairly safe from any downturn in the property market.

That said, the couple do need to remain aware of the potential pain of managing the properties (overcome in the past by using reputable agents), as well as the possibility of loss of income if the properties should become unlettable and/or if new Labour were to bump up tax on rental income. If the Butterfields did decide or need to sell a property in the future then it would be tax-efficient for this to be their present home, as profits on this, as their "principal place of residence" would be free of capital gains tax (CGT). They could either move into one of the investment flats (profits on which are subject to capital gains tax so long as it is not their place of residence) or even trade down.

Ashley has not put as much in his pension fund as he could have over the years. Under "carry back" and "carry forward" pension rules it may be possible to top up his pension plan by as much as pounds 50,000 when the business stops trading. By putting this money in his pension plan Ashley would in effect avoid paying much of the expected pounds 14,000 income tax bill - the tax relief on the investment would cancel out the bill. Once invested, the money would also grow tax-free and, when cashed in, a quarter could be taken as a tax-free lump sum.

Part of this big pension investment can come from the maturing endowment policy, which should be worth at least pounds 25,000. If the mortgage lender will allow, the Butterfields should keep their pounds 10,000 mortgage, so that the interest can be offset against the before-tax rental income. Given that the Butterfields are older they should beware of direct exposure to the ups and downs of the stock market. Instead they should choose "with-profits" pension funds and those with guarantees.

The pounds 40,000 of premium bonds the Butterfields presently have are not an appropriate investment given that the couple want a guaranteed and even flow of income. Most, or all, should be sold.

Along with the pounds 30,000 no longer needed to back the tour business, the Butterfields will still have a portfolio that is unnecessarily flush with cash. They could leave pounds 25,000 in a range of societies in the hope of windfalls. Then they should look at tax-free PEPs. The couple can put a total of pounds 12,000 into general PEPs this tax year, though that is still likely to leave more than pounds 60,000.

The Butterfields have no desire to manage their own investment portfolio. With this in mind they could consider a unit trust management service. It would be possible to set up a regular withdrawal facility to create an income paid in part from the sale of units. This money could be used both to fund the pounds 10,000 that is to go to charity and to bridge the shortfall between the rental income and the required inflation-proofed pounds 15,000.

Assuming the Butterfields draw pounds 3,000 a quarter from the PEPs and unit trust service, and that the funds meanwhile grow by an average of 7.5 per cent a year, then this money would run out after eight years. By that time, when Ashley is 65 and also due a reduced state pension, the pension funds should have grown substantially allowing them to be cashed in to replace the PEP and unit trust income.

q Ashley and Jane Butterfield were talking to Stephen Dight, managing director of Grosvenor Financial Services, which is based in Henley-on- Thames and is a member of The Financial Options Group, a network of independent financial advisers.

If you would like to be considered for a financial makeover for publication, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL. Fax: 0171-293 2096 or 2098; e-mail: s.lodge@independent.co.uk. Please include details of your current financial situation, a daytime telephone number, and state why you think you need a makeover.

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