Money: Financial Makeover - Afraid of retiring hurt

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The Independent Online
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: 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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