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FINANCIAL MAKEOVER
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STEWART and Clare Faulkner are 50 and 53 respectively and have two adult sons who are off their hands financially. He earns pounds 41,000 as an IT manager; she pounds 6,000 as a part-time doctor's receptionist.

They have a house in the Wirral worth pounds 150,000 with a mortgage of pounds 100,000 outstanding and a property in France with a mortgage of pounds 27,000 remaining.

They have next to no savings, although Mr Faulkner has a pension with Royal Assurance which, if he could draw it now, would give an income of pounds 3,856 a year.

The Faulkners are having to move south because of Mr Faulkner's job and are consequently selling their house. They plan to live rent-free with Mr Faulkner's mother and so hope to be able to save pounds 20,000 a year. They want to build up their savings and then retire to France. But how long will it take? They think they could get by on an income of pounds 8,000 a year in France.

What a financial adviser recommends:

Mr and Mrs Faulkner are going to have to be very disciplined with their saving. But they could put enough aside in nine to 12 years to retire to France with their desired level of income and by saving as little as pounds 10,000 a year out of Mr Faulkner's income. Indeed, they are unlikely to be able to meet their target of saving pounds 20,000 a year.

The starting point is the proceeds from selling the house in the Wirral. They should walk away with pounds 50,000 from that - pounds 23,000 after paying off the mortgage in France.

Even if Mr Faulkner pays nothing more into his Royal Life pension plan it should produce an annual income of pounds 6,200 from when he is aged 62 (12 year's time), given reasonable investment performance. Inflation, however, will mean that pounds 6,200 does not have the same spending power as it does now.

Both Mr and Mrs Faulkner should also be entitled to half-decent state pensions at age 65 and 60 respectively since they have both worked for the bulk of their adult lives. They will be able to get these pensions even if they are living in France.

Mrs Faulkner will not be working in London, which is bad news for the couple's income but does mean she will have an unused personal allowance that will allow more than pounds 4,000 of investment income to be taken tax- free.

The Faulkners should look to build up a portfolio of gilts - UK government bonds - to make use of this allowance. These bonds offer guaranteed levels of income, and after the election it should be possible to pick up gilts yielding as much as 8 per cent, which would be tax-free if held in Mrs Faulkner's name.

In addition, the Faulkners should favour PEPs over pensions for building up other tax-favoured savings. PEPs can be cashed in at any time without cost whereas pensions, although offering upfront tax-relief (40 per cent in Mr Faulkner's case), are generally less flexible.

They should buy PEPs that both produce growth and give a rising income. This can be reinvested until retirement and spent thereafter. The fact that the income should rise will protect against any diminution in spending power due to inflation.

If they save pounds 10,000 every year for the next nine to 12 years they could realistically save a sum of pounds 150,000 or more, with investment growth. That should be capable of producing the income the Faulkners need for retirement, including having it increase in line with inflation to maintain their spending power.

But the Faulkners need to bear in mind exchange and tax rates when they come to draw that income. If too much of their investment portfolio is in sterling-denominated assets then, should the pound weaken against the franc, this could seriously affect the couple's income. To reduce this risk it might be worth considering French investments.

Of course, the possible introduction of a single European currency might alleviate currency risks but the Faulkners cannot rely on this.

The Faulkners should be aware that, being resident in France, they might be liable for elements of tax on their investments in both the UK and France. Offshore investment funds may be one way of simplifying the issue, although wholly tax-free investments such as PEPs may well be preferable.

Mr and Mrs Faulkner were talking to Tim Phillips, a chartered accountant and senior partner with the Elwy Partnership, an independent financial adviser in the North-west of England.

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. 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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