Money: Financial Makeover - Afraid of retiring hurt

Barry Smith, 54, is a self-employed writer and illustrator of children's books whose income fluctuates a lot - it has been between pounds 2,000 and pounds 38,000 a year in his 23 years of self-employment. Presently he is earning around pounds 15,000 a year.

He has an pounds 11,000 endowment mortgage with Nationwide (the endowment policy is with Scottish Amicable) on his 60 per cent share of a flat in Hackney, east London. Barry also inherited a flat in a coastal resort in New South Wales, Australia, which is worth around pounds 50,000.

He has a collection of pensions and insurance-linked savings plans worth pounds 58,000 and shares and personal equity plans worth a total of pounds 70,000.

Barry is looking forward to retiring, possibly to Australia. He feels he was sold some poor financial products in the 1980s and would like to know how to reorganise his finances, particularly for retirement, without making any additional savings from his relatively low income.

What a financial adviser says:

Barry will probably be retired before his mortgage is paid off as the endowment policy matures in 13 years' time, when he is 67, but much of his pension savings will start paying out from when he is 65.

He should approach Nationwide to see whether the building society might offer him a better deal for an existing borrower. You do not have to switch lenders to benefit from the remortgage deals now widely available. He may well be able to obtain some sort of cash-back, discount or a favourable fixed-rate remortgage. Such a deal may tie him into the Nationwide for a further period, but if he has no plans to move the mortgage, then it makes sense.

Barry should leave the Scottish Amicable policy as it is until maturity. If he encashes it early, he stands to lose a portion of the maturity bonus (also called the terminal bonus).

In total, Barry has five separate pension plans with Barclays, MI Group, Equitable Life, Scottish Equitable and NPI. As a general rule this is too many as in each case the companies will probably be making some flat- rate charges that on smaller amounts could have a relatively big impact. The funds he has invested in are also quite a mixture, from cautious with- profits funds (which never fall in value) to funds invested in the Far East.

With hindsight, Barry would have done better having the main chunk of his money directly exposed to the UK stock market in "unit linked" funds. That said, at his age and looking to retire within 15 years, it is not necessarily a good idea to switch out of these with-profits funds. Likewise the international funds he has are probably at least as good homes for his money as the United Kingdom, given the present all-time high of the UK stock market. If he does feel brave enough to face the UK stock market directly through unit-linked funds, he should look to be back in with- profits at least five years before retirement. True, Barry's pension portfolio is far from ideal, but rationalising it is a different matter. In many cases there will be charges for stopping payments into his plans. That aside, as a self-employed person Barry should, where he can, take up "waiver of premium" options on his pension plans so that if he cannot work through ill-health, his plans will continue to be funded.

As well as his pension plans Barry has insurance-linked savings policies with Irish Life and MGM. Again, for the premiums that Barry is paying, the charges can be high for these types of policies. But if he cashed them in now, he would most likely lose out. I am afraid that Barry is rather stuck with what he has.

Barry also has a collection of shares and investment trusts, some in PEPs.

He has a Foreign & Colonial PEP that has done well, virtually doubling his money over a five-year period. But with a single-company PEP he has with Barclays he should check the charges and work out whether it is worth his while being in the PEP, bearing in mind that he is a basic-rate taxpayer. The main tax saving is on the dividends of the shares at a rate of just 20 per cent of the value of the before-tax dividend.

Barry has concerns about putting money in investment funds such as unit trusts, the main one being that he is not convinced that the fund managers justify their fees. But direct shares, which represent a fair proportion of Barry's savings, are a relatively high-risk investment route. The downside of individual share investments is that too much of the portfolio is dependent on one share. With the relatively modest amount that Barry has invested, he would be better off with more investment funds, whether unit trusts or investment trusts.

When Barry does come to retire he should shop around for the best deal on cashing in his pensions, taking what is called the "open market option" to get the best annuity rate he can. Bearing in mind that this will provide him with an income for the rest of his life it is worth getting independent financial advice at that stage.

Barry has indicated that he would like a pounds 20,000 a year income to enable him to retire. Taking into account all his savings (including the state pension he will be due), and assuming he continues to save pounds 750 a year in his pension plans, when he is 65 he should be close to his target, and by the age of 70 he should reach it.

But Barry should also remember that if he does go to Australia, he will probably sell his flat in London and realise some pounds 40,000 from this. This can be further invested to generate income at that time.

q Barry Smith talked to Amanda Davidson, a partner at Holden Meehan, a firm of independent financial advisers (0171-692 1700).

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.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Sport
Manchester United's kit for the 2014/15 season
football
News
Nadine Gordimer died peacefully at home yesterday
peopleNobel laureate was a powerful anti-Apartheid voice
Extras
indybest
Arts and Entertainment
Neil Young performs on stage at Hyde Park
musicAnd his Hyde Park set has rhyme and reason, writes Nick Hasted
News
Women have been desperate to possess dimples like Cheryl Cole's
people Cole has secretly married French boyfriend Jean-Bernard Fernandez-Versini after just three months.
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
Extras
indybestThe tastiest creations for children’s parties this summer
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Finacial products from our partners
Property search

Consumers given power to choose a green deal

How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.

'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers

City regulator says existing customers suffer worst rates

Motor insurers divided on proposals for whiplash ban

MPs want medical evidence for claims. Will this bring higher premiums?

British Gas repays £1m for mis-sold deals

British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.

Bare necessities of life cost a pensioner £10,000

Pensioners now have to spend £10,387 a year on basic necessities such as food and fuel. new figures published today reveal.

Six months since its introduction, Obamacare has set market's pulse racing

As America's health reforms take effect, some firms look well placed to benefit, says Simon Read

Holidaymakers warned over hidden charges when opting to pay in sterling abroad

Fresh warnings emerged this week that overseas retailers and hotels aren't playing fair.

Employees will be able to request flexible hours in drive to make workplaces family friendly

From next week employees will be able to request changes to working hours. Rob Griffin weighs up the options

E2Energy's wind-turbine scheme offers green investors 7.5 per cent a year

If you're fed up with paltry returns on your savings and are interested in green energy, a new loan-based crowdfund launched this week could be a better home for your cash.

Why miss the chance of tax-free returns as Isas raise their game?

The tax-free limit of £15,000 is a big jump and rates for savers are starting to edge up, writes Simon Read
More and more trade drivers are falling prey to fraudsters

'Crash for cash' gangs target white van man

"Crash for cash" accidents are reaching record levels. The insurer Aviva trawled through its claims data to discover that fraudulent "slam-ons" – accidents deliberately caused in order that claims can be made for whiplash compensation – rose by 51 per cent in 2013.

Lenders lose their appetite for debt forgiveness

Banks may be getting tougher with people who fall into financial difficulties, a debt charity has warned. Statistics from The Money Charity reveal that the amount of personal debt written off by banks and building societies reached an all-time low during the first quarter of the year.

Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Junior Professional Services Consultant - SQL, Implementation

    £30000 - £40000 per annum + BONUS + BENEFITS: Harrington Starr: A leading prov...

    Programme Planner

    £30000 - £45000 Per Annum: Clearwater People Solutions Ltd: Our client based i...

    HTS GBM - KDB Developer, Kx Q Query Language, £750

    £650 - £750 per day: Orgtel: Senior Analyst Developer (KDB/QKx plus Java and F...

    Infrastructure Test Lead

    £55000 - £60000 per annum + bonus + bens: Deerfoot IT Resources Limited: Our c...

    Day In a Page

    Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

    Super Mario crushes the Messi dream

    Germany win the 2014 World Cup in Brazil
    Saharan remains may be evidence of the first race war, 13,000 years ago

    The first race war, 13,000 years ago?

    Saharan remains may be evidence of oldest large-scale armed conflict
    Scientists find early warning system for Alzheimer’s

    Scientists find early warning system for Alzheimer’s

    Researchers hope eye tests can spot ‘biomarkers’ of the disease
    Sex, controversy and schoolgirl schtick

    Meet Japan's AKB48

    Pop, sex and schoolgirl schtick make for controversial success
    In pictures: Breathtaking results of this weekend's 'supermoon'

    Weekend's 'supermoon' in pictures

    The moon appeared bigger and brighter at the weekend
    Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

    How Saudi Arabia helped Isis take over northern Iraq

    A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
    The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

    The evolution of Andy Serkis

    First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
    You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

    You thought 'Benefits Street' was controversial...

    Follow-up documentary 'Immigrant Street' has got locals worried
    Refugee children from Central America let down by Washington's high ideals

    Refugee children let down by Washington's high ideals

    Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
    Children's books are too white, says Laureate

    Children's books are too white, says Laureate

    Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
    Blackest is the new black: Scientists have developed a material so dark that you can't see it...

    Blackest is the new black

    Scientists have developed a material so dark that you can't see it...
    Matthew Barzun: America's diplomatic dude

    Matthew Barzun: America's diplomatic dude

    The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
    Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

    Meet the 'Quantified Selfers'

    From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
    Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
    Mrs Brown and her boys: are they having a laugh?

    Mrs Brown and her boys: are they having a laugh?

    When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor