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Investment Masterclass


John and Marion Cannon. Age: 52 and 50. Occupation: Police officer and teacher

John and Marion Cannon. Age: 52 and 50. Occupation: Police officer and teacher

John Cannon is about to retire from the police force. He will receive a lump sum of about £70,000, plus a £14,000pension. His wife Marion intends to continue working. To date their investments include a Scottish Widows Tracker PEP, PremiumBonds, and a number of Police Mutual investments.

They have a mortgage, backed by an endowment policy, that is likely to deliver more than £8,000 above the sum of about£35,000 they owe at maturity in 2003. This will not be available for about four years and likewise the maturing Police Mutualpolicies.

The couple wish to use this lump sum for income purposes, without endangering their capital. They're wary of stockmarketinvestments. At their ages, they need to consider a financial plan for at least the next 25 years.

The Scottish Widows Tracker was purchased early this year and should prove to be a very satisfactory long-term investment. It simplytracks the UK FTSE 100 share index. It does not provide any income so will not help the Cannons from that point of view.

John and Marion have estimated that an additional £200 per month, or £2,400 annually, would be ideal. This equates to approximately 3.7 per cent net on a lump sum of £65,000 - £65,000 is taken because they wish to maintain around£10,000 for emergency purposes in the building society, £5,000 of which is already there.

The adviser: Tim Cockerill, managing director at Whitechurch Securities, independent financial advisers in Bristol (0117-944 2266).

The advice: One of the most suitable investments would be a with-profits bond. I would suggest a high-quality provider, such asScottish Widows or the Prudential.

A with-profits bond invests in equities, property and fixed interest and each year the life company declares an annual bonus rate whichis added to the value of your investment.

When the bond is cashed in, a terminal bonus is also added. The need for John and Marion to cash in the bond is not that great, andso the issue of the terminal bonus needs to be considered carefully.

I would suggest that they take income from the bond.

This could be delayed to allow the bond a period in which to grow further.

John and Marion already have exposure to equities through their Scottish Widows Tracker PEP. They may eventually wish to convertthis to an income- producing fund.

However, I would recommend a portion of their lump sum be placed into income-producing equity unit trusts (through an ISA wherepossible) because these investments will give - over the years - both a rising income and capital growth.

Obviously through investing in equity income unit trusts there is an increased level of risk. They will see the value of their investmentsfluctuate, but over the long term equities have far outperformed deposit accounts and cash-based savings

I would recommend the following split between with-profits bonds and equity income funds and suggest the following investments:

Scottish Widows With-Prfts Bond: £40,000 @ 5% pa £2,000 pa

Newton Higher Income ISA: £7,000 @ 3.2% pa £224 pa

Threadneedle Equity Income ISA: £7,000 @ 3.1% pa £217 pa

Jupiter Income: £9,000 @ 2.6% pa £234 pa

Total: £2,675 pa

When the mortgage is paid off in 2003, John and Marion will be £350 a month better off. In essence, the need to produce£200 per month will disappear. They might want to consider whether they really need that £200 per month because, theless income they take now, means that the investments will have a greater opportunity to grow. However, I would not advocatesacrificing a comfortable lifestyle today in the hope of a better one tomorrow.

Both John and Marion will remain basic rate tax payers, so they will not be subject to any additional tax on their with-profits bond orany of the other investments. Their house is worth about £250,000. With their other assets it does push them over theinheritance tax threshold. This is not something to be concerned about at this stage, but to be aware of as tax regimes and allowanceswill change.

There are numerous options they could consider to mitigate this liability, such as holding the home as tenants in common, but furtherconsideration would be needed, and that is beyond today's remit.

The above recommendations were quite simple, but there is no need to complicate things, and it is very important that John and Marionshould feel happy and comfortable with their investments - the last thing they want is to worry about them.

Alternative advice: John and Marion have a mortgage where interest payments are £240 per month. This amounts to £2,800 a year and the mortgage has four years to run. Over the next four years they will be paying £11,500 in interest - I amassuming for simplicity's sake that interest rates do not change.

The couple could use part (£35,000) of the lump sum to repay the outstanding mortgage. This would save them £11,500in the next four years, the equivalent of receiving 8.2 net on an investment of £35,000.

Could £35,000 be invested elsewhere and receive a similar risk-free net payment for the next four years? The simple answer isno.

Central to all of this is that the endowment policy is still funded. In four years' time when it matures John and Marion will receive alump of approximately £43,000. This would then need to be reinvested.

The advantages of this route are that the need to generate £200 a month from the lump sum disappears, as the saving is £240. Second, the remaining money can be invested more adventurously, if they wished, in order to give potential for greater capitalgrowth.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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