World traveller trains her sights on a steady income

Financial Makeover


Mary Loosemore. Age: 29. Occupation: Trainee teacher

Mary Loosemore. Age: 29. Occupation: Trainee teacher

After 21 months travelling the world Mary has decided it may be time to settle down and start her teacher training at the end of the month. Earlier, she had been training as a solicitor, and has accumulated capital through working and inheritance.

Mary has £75,000 in the building society and two small accounts for day-to-day money. She rents out the house she owns which generates an income of around £4,000 a year. She does not wish to sell the house because it is a steady income stream and its value has appreciated. Her other investments are windfall shares from Northern Rock and Lloyds TSB, National Savings certificates purchased at the end of last year and a small personal pension with Equitable Life.

Mary's immediate concerns are having sufficient income to lastthrough her training course and the first few years as a teacher. She thinks she will buy a house in three or four years once she has found a school she likes and settles into teaching. Mary describes herself as a medium- risk investor but, because of the relatively short- term nature of her plans, it is important to maintain flexibility and not to become over- committed in long- term investments.

The adviser: Tim Cockerill is managing director at Whitechurch Securities, independent financial advisers in Bristol, tel: 0117 9442266.

The advice: It is always a little difficult when your circumstances are like Mary's, because she may find the school she wants to work in and a house she wants to buy soon after completing her course. Or she may not find herself in this position for five or six years. So I would suggest keeping around £30,000 in cash in the building society.

This will generate a modest income to help meet her daily expenses but the money remains secure and available at short notice in the immediate future. The last thing Mary should do is commit much of her capital to investments which require a time-frame of, say, five years or more, because she may find she needs the money and is either tied to a fixed period, or stock markets have not been favourable and it's not a good time to cash in.

But to make Mary's money work harder some should be invested in products which generate a better return. These are longer-term investments but, given the money in the building society, flexibility remains intact. I suggest the American International Group (AIG) 8 per cent Stockmarket Bond. Mary can either take the 8 per cent net as annual income or roll it up as growth.

She would have to remember that once she opts for either income or growth she cannot change her mind later. This bond also returns her original investment, provided the FTSE 100 Index is at the same level, or higher, at the end of the four-year bond term. Although this investment does tie Mary in for four years, the additional return it offers is well worth the additional commitment. I suggest £15,000 is placed with AIG.

Next, I would recommend a good old-fashioned With Profits Bond through a provider such as Scottish Widows or Prudential. These are excellent low-risk investments whose value will not fall. Each year an annual bonus is declared and added to your policy. When you cash it in a terminal bonus is added, enhancing the return still further. Once again a net return, and although the tax cannot be reclaimed it still remains very attractive.

Mary can have the bonuses paid to her to supplement her income or leave them to build up. Unlike the AIG bond, she can change her mind once the policy is set up. The only drawback to these bonds is that if they are cashed in early, say within five years, the investor suffers an exit penalty. Mary's time-frame suggests she would cash this in after four years, at the earliest. As a result, the exit penalty would be relatively small, but a kindly broker could enhance the initial investment, thus eliminating the penalty. Again I suggest £15,000 is placed in the with- profits bond.

Finally, I would place the remaining £15,000 into unit trusts. This is the element of the portfolio designed for long-term growth, which obviously has the greatest growth potential. Fifteen thousand £ will not interfere with Mary's plans to buy a house or anything else that comes along.

I would suggest £ 7,000 of this is placed via an ISA, and the Fidelity ISA, is ideal, giving investors a wide choice of funds. The Fidelity UK Growth and Special Situation funds, both UK-based, make a nicely balanced combination which would suit Mary ideally. The remaining £8,000 I would split between two other trusts, the first being Britannia International Special Opportunities, which, in essence, takes the best ideas from all of the fund managers at Britannia and wraps them up into one portfolio. Its long-term record like those of the Fidelity funds has been very good.

The final fund I would use is the the Investec Guinness Flight Wired Index. This is higher risk, and Mary will have think about it carefully. But with the huge advances in technology over the past decade the world economy is being transformed, and this fund invests in 40 shares ideally placed to benefit from the changing world economy. There will be times when it has a bumpy ride but long-term the potential is enormous. The unit trusts are not designed to produce an income but the rental from the property, the interest from the building society and the returns from the AIG and with- profits bond should be sufficient to meet Mary's income needs.

There are a couple of other things for her to consider. The two windfall shareholdings she may wish to keep or sell and reinvest into more unit trusts. Her National Savings Certificates have a five-year life and should be kept, and her small Equitable pension cannot be touched until retirement date.

She is not able to contribute any further money to it and will, of course, benefit from the teachers' superannuation scheme. This pension scheme has been criticised many times, but it is an extremely good pension which few organisations can match.

Independent Partners: 10 top tips for retirement. Get your free guide here

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