r The purchase of a home for their retirement costing, say, pounds 100,000.
r A retirement income, net of tax, of just over pounds 15,000 a year in today's terms.
r To use reinvestment relief to defer part of the chargeable capital gain arising from their Cheltenham & Gloucester "windfall" in August 1995.
r To keep their investments on track following on from the advice they received in 1995, particularly if there proves to be a bumpy ride ahead on the stock market.
Tim and Linda have a portfolio of deposits, National Savings, traded endowment policies, gilts unit trusts and PEPs. These aregeared to growth rather than income. The likely income shortfall needs to be more accurately established between Tim's age 60 and 65 and thereafter.
Between now and 1999, when Tim is 60, the PEPs can be transferred into equity income funds with a view to providing rising tax-free income with, hopefully, protection of capital against inflation.
With the need to buy a retirement home for pounds 100,000 in mind Tim and Linda have just realised pounds 28,000 from one of their equity linked investments and have over pounds 100,000 in building society deposits. They have purchased three traded endowment policies (costing about pounds 63,000) and set aside pounds 40,000 of the building society cash to cover the purchase of a retirement home. After allowing for this purchase, Tim and Linda have about pounds 170,000 invested, ample to provide the extra income required. even at the relatively low initial yield available from a balanced equity portfolio. They need not therefore feel threatened by short-term stock market volatility.
Of the pounds 100,000 on building society deposit, pounds 40,000 will need to be retained in cash since the house purchase is likely in the next two years. This can also serve as an emergency reserve in the interim. The balance can be used to start a Tessa for Tim, make the 1997/98 PEP investments and take advantage of any opportunities which may arise - particularly if a fall in stock market valuations provides a good window in which to invest for long-term income and growth.
Their current annual expenditure exceeds pounds 21,000. However, once Tim retires, and they move into their new home, they will save over pounds 6,000 a year in rent and pension contributions. This indicates a required net income of pounds 15,000 per annum or so. An updated forecast of likely pensions is now needed.
At the time of the last review these were estimated as Tim pounds 11,915 and Linda pounds 1,925 per annum. After tax, this indicates a joint pension income of about pounds 12,400. Further income of pounds 2,500- pounds 3,000 per annum will need to be generated from investments and this will need to be protected against inflation as far as possible.
Even though he has taught overseas from time to time he will undoubtedly have accrued some state pension entitlement in the UK, payable from the age of 65. Tim should immediately complete and send form BR19 to the Benefits Agency to request a retirement pension forecast. It may well be the case that the Agerbaks' initial objective from their investments will be to provide a bridging income until Tim's state pension starts at age 65, whereupon things can be reviewed again.
Linda is receiving no retirement pension but should check whether she has any entitlement. Meanwhile, Tim should continue as he is now, paying maximum additional voluntary contributions (AVCs) to tax-efficiently boost his prospective occupational pension.
Tim and Linda's joint account with the Cheltenham & Gloucester produced a windfall in excess of their annual capital gains tax exemptions and they paid over pounds 1,700 in CGT. They are waiting to see what indexation relief may be available following Clark Whitehill's successful challenge to the Inland Revenue (The Independent, 5 February 1997).
Meanwhile though, as Quakers, the couple have a strong desire to see that their investments are ethically sound and were delighted to be able to make a small investment in a wind farm co-operative in Cumbria known as Baywind. This qualifies under the Enterprise Investment Scheme (EIS) for income tax relief at 20 per cent and they can also elect to defer part of their C&G capital gain by reinvesting under this EIS.
Such an investment would normally be considered unduly risky for a couple like the Agerbaks but they have taken comfort from Baywind's 15-year contract under the Government's non-fossil fuel obligation (NFFO). Under EIS rules it is possible to defer capital gains tax where the chargeable capital gain is reinvested (in part or whole) into qualifying shares within three years of the date of the original gain (which must be after 29 November 1994). They should however bear in mind that CGT is deferred rather than avoided.
Consideration ought to be given to the inheritance tax (IHT) implications of the current wills, which are wholly in favour of each other. This is entirely understandable but not very tax-efficient as it will result in a tax liability on the last death which could be avoided if use is made of the "nil-rate band" of IHT on each death. This involves leaving some assets on the first death to beneficiaries other than the surviving spouse.
They may well feel uncomfortable with this since this course of action could leave the surviving spouse short of income. The answer may be to leave assets under a discretionary trust from which the remaining spouse could potentially benefit.
Finally, thought should be given to how the cost of long-term care may be met, should this be required. Both regular premium and single premium insurance arrangements are widely available.
Paul Gauntlett can be contacted at IFA Moors, Marr Bradley on 01908-66228.