OCCUPATION: Managing director of graphics design firm
PROBLEM: Ian set up his company, Greyhound Graphics, seven years ago, working out of his home in Bristol. Since then, he has expanded into an office, employing seven staff, including him. Ian, who is single and has no children, pays himself pounds 35,000 a year. He feels that having got rid of his overdraft he is in a position to pay more attention to his personal finances.
His one major expense is his pounds 50,000 home repayment loan. This is backed by decreasing term assurance, so that as the capital owed falls over the years, so does the amount of cover needed to pay off the loan. This type of term assurance is often cheaper than standard cover.
Ian is contracted out of his state earnings related pension scheme.
There are two aspects of his financial planning that Ian wants to resolve. The first involves improving his virtually non-existent retirement provision. The second is how to invest a pounds 6,000 lump sum he has accumulated over the past few years.
THE ADVISER: Roddy Kohn, of Kohn Cougar, independent financial advice firm in Bristol (0117-946 6384).
THE ADVICE: "Ian needs to look at a number of issues that affect his business and personal financial interests. It is obvious that he has dedicated most of his spare capital to invest in the business. This is commonplace when starting up but he recognises that this has been at the expense of his pension provision and could have grave consequences if allowed to continue.
In this respect he has two choices open to him - either to take out a personal pension, which has the attraction of offering the prospect of early retirement from age 50, or to set up a company pension scheme (called SSAs). This is more restrictive as far as early retirement, but will allow him the opportunity to contribute almost twice as much as the 20 per cent he is allowed to place in under a personal pension.
This option becomes more important because we have also discussed the prospect of using the company pension scheme to purchase new premises he anticipates will be needed in five years' time. The SSAs scheme allows him to do that by using the capital built up within the fund, plus some borrowing from a bank to buy the freehold of the building.
At retirement, the directors can either sell the building or choose to receive an income from the rental income received by the fund.
Ian is also keen to include his company director, Sean Tobin, in this idea.
Because he pays higher tax on part of his income, I suggest he could make use of "salary sacrifice" when making personal pension payments to the scheme.
This would allow him to take a smaller salary, in return for paying higher pension contributions, which enjoy additional Inland Revenue funding at the marginal rate of tax, 40 per cent in his case. The advantage of this strategy is that it reduces National Insurance for both employer and employee, another 20 per cent or so saved by his business.
Ian also recognises that pension scheme arrangements can be made available to all members of staff. However, in the light of potential complications introduced by the Pensions Act, which came into force last month, a separate Group Personal Pension scheme (GPP) may be more appropriate. This is a personal arrangement for each member of staff, which is far less complicated for the employer. But the issue needs to be discussed in far more detail.
Ian has left himself vulnerable to the danger of long-term illness. While the company can provide him with a Permanent Health Insurance (PHI) scheme, which replaces income while a person is unable to work through illness, he needs to consider taking out additional critical illness (CI) cover for pounds 200,000.
This would cost about pounds 58 a month. The purpose of CI cover is to safeguard him were he to fall victim to a range of illnesses, such as a heart attack, cancer, a stroke or kidney failure. The lump sum payable could be used to pay any outstanding mortgage. The balance of the capital should produce a further pounds 10,000 income per annum.
This would still leave him with some financial difficulty in retirement, so I recommend that he effect an executive permanent health insurance policy for 50 per cent of his salary, plus an additional allowance for pension contributions that will be paid if he is unable to return to work.
Although we are including a company director in the same scheme, tax relief will not be available to the company for this executive PHI policy. To do so, the scheme must be made available to all staff.
Ian is keen to invest a lump sum of pounds 6,000 but would prefer not to tie it up in his pension. I recommend a Growth Personal Equity Plan with Gartmore fund managers, to be split 50/50 between UK Smaller Companies and the European Smaller Companies Fund. I believe there is a need for emphasis on Europe and smaller companies rather than just FTSE 100 firms.
Ian must consider Key Man cover. On the death of a key employee, this type of policy pays a lump sum to the employer who can use the capital to attract a replacement of a without too much loss of continuity."