Occupation: Health visitor.
The problem: Margaret, who is single, plans to remain in the NHS until retirement at 65. She has just inherited about pounds 25,000 from her mother and wonders what to do with it. Her main concern is to provide for security in retirement. She is an ethical investor but does not wish to take undue risk. She has a mortgage with Midland and an endowment mortgage with Clerical Medical. She is in negative equity.
The adviser: Amanda Davidson, a partner at Holden Meehan independent financial advisers, 5th floor, New Penderel House, 283-287 High Holborn, London WC1V 7HP, phone 0171-692 1700.
The advice: The most important thing is to provide Margaret with security. Because she is single, she has no-one else to rely on. She has no other expectations of inheritances, therefore it is very important to make the best use of this money. As regards her retirement, it is important that Margaret fully funds her NHS pension. The NHS scheme is very good, providing a great deal of security and good benefits for a modest contribution of 6 per cent of income.
Her pension history prior to her NHS career is somewhat fragmented. I calculate she has a total, to date, of 15 years' service in the NHS scheme. If she works until she is 65, this will bring it up to 27 years. There is a shortfall as 40 years' service provides for a maximum pension.
Margaret has made some additional one-off contributions of pounds 500 each in 1994 and 1996. These will help, although my calculations show that in real terms they are jointly likely to produce an additional pension income of something like pounds 100 a year at age 65. She has funds invested in the South American Missionary Society Pension Scheme, from a period working abroad. However, these will only provide some pounds 185 a year at age 60.
Margaret should investigate purchasing additional years in the NHS scheme. She needs to be very careful in her choice of additional contributions. She could elect to take a free-standing arrangement (FSAVC). Margaret would be able to invest in an ethical fund, but she would pick up all the charges herself.
She can also take out an investment-type additional contribution through the NHS. But her safest route is to buy additional years instead. She can make contributions either monthly or via a lump sum.
Margaret should ask the pensions department at the NHS how much she needs to contribute in order to achieve maximum service. It would also be sensible for her to make sure what her pension contributions have been. The NHS will know what years of service will count. If she has had any refunds because of periods abroad then she may be able to buy back these years at reduced cost. In 1991, Margaret asked for a projection of her state retirement pension. It might be a good idea to update this by writing to Newcastle and completing the BR19 Social Security Form. The expected pension the DSS has projected at age 60 would amount to some pounds 3,200 per annum. Since Margaret intends to work until she is 65, she might like the DSS to give her projections for the pension at age 65 as well as 60.
Unfortunately, Margaret is in negative equity. She has a mortgage with an endowment. From her inheritance, I would like Margaret to pay off pounds 15,000 of her mortgage. This will bring her mortgage down to under the value of her property.
Margaret is a low-risk investor and discharging some of her mortgage fits in with this risk profile. Bearing in mind that she is probably paying an interest rate of 8.45 per cent, as a basic-rate taxpayer she would have to achieve a rate in excess of about 10.5 per cent to net an 8.45 per cent rate. This would be on a no-risk basis so this would be an impossible rate to achieve in today's climate.
By paying off some of her mortgage, Margaret will reduce her mortgage payments by about pounds 105 per month. This pounds 105 could be used to pay towards her added years. If she pays pounds 105 into some form of pension this will be grossed up to achieve about pounds 136 worth of savings. Also, Margaret will have a greater sum coming to her from the endowment when she is 63, as the mortgage will be reduced. Clerical Medical's with- profits performance has been above average for some time.
Margaret has only two more months to go on a loan that is costing her pounds 150 a month. I suggest some of this money also goes towards paying for some added years. The maximum Margaret can invest in added years is 9 per cent of her income, or pounds 150 per month gross. This nets down to a cost of pounds 115.50 per month. The rest of the money can be saved in a monthly unit trust savings plan such as the Stewardship Trust offered by Friends Provident or used to increase the PEP investment.
I recommend Margaret keeps some money in a building society. She would like to spend pounds 2,000 on a trip to South America to visit friends next year. Margaret could amalgamate the the remainder of the money with an account she has with Halifax, or she could look elsewhere. If she puts her money in Sainsburys Bank it will give her 6.5 per cent gross. To give Margaret a chance of some good returns over the long term, she should invest pounds 5,000 in a PEP. Ethical PEP providers NPI or Jupiter will offer a broad geographical spread and their funds have performed well.
The verdict: I was amazed at Amanda's grasp of what I thought was a rather complex situation and impressed by her excellent and full report. I especially valued her comment on my NHS pension.Reuse content