Wealth Check: A redundant engineer wants a new life

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The Independent Online

John Allen is to be made redundant from Pfizer in October and at 39, the software engineer plans to set up an IT consultancy business in Canterbury, Kent.

Mr Allen's wife is Alison McLeod, 39, a statistician, who works part-time for Pfizer. She is employed 20 hours a week, and plans to stay with the company. They have three children Joe, nine, Ruth, seven and Hazel, four. They would like to know if they are eligible for child tax credits, or any other benefits.

They live in a three-bedroom semi-detached house in Canterbury, worth £190,000. They have a £31,000 repayment mortgage with Standard Life.

Mr Allen expects a redundancy payment of £37,000. "Should we pay off some of the mortgage?" he asks. Mr Allen has been paying into the Pfizer final-salary pension scheme for 11 years. "Should I consider putting some of my redundancy into my pension before I leave?" Mr Allen and Ms McLeod have 820 Pfizer shares between them. "We feel we have a lot of our savings tied up in the company," says Mr Allen. "Should we sell some?"

Both have company life insurance, but Mr Allen's will cease on redundancy. "How much cover should I be looking for?" Mr Allen asks. "Our flexible mortgage offers a quick and relatively cheap way to borrow money, should we need it. Also, should I consider moving my Pfizer pension to a private one?"

We put their case to Jennifer Storrow, managing director of Gee and Company, Patrick Connolly, of Chartwell Investment Management, Juliet Scholing, head of research at Chelsea Financial Services, and Amanda Davidson, partner of Charcol Holden Meehan.

John Allen and Alison Mcleod, both 39

Occupations: Mr Allen is a software engineer and Ms McLeod is a statistician. Both work for Pfizer in Sandwich, Kent;

Salaries: Mr Allen, £55,000; Ms McLeod £36,000;

Education: Mr Allen has a BSc in maths and computing. Ms McLeod has a BSc in statistics;

Debts: £31,000 mortgage;

Savings: First Direct £6,000; Nationwide £700; premium bonds £2,500; £28,000 endowment with Norwich Union maturing 2012; life assurance/ savings plan to mature 2004, paying £4,000;

Pensions: Pfizer final-salary schemes;

Shares: 820 Pfizer shares;

Property: Three-bed £190,000 semi-detached house in Canterbury, Kent;

Outgoings: (Per month) Nanny £1,000; food, petrol, domestic bills, taxes £1,100; charities £150.

Solution 1: Redundancy lump sum

Mr Connolly says there should be no rush to invest the redundancy payment. A sensible approach would be to use most of this to pay off their mortgage. The savings they would gain by doing so amount to about £353 a month.

Ms Davidson says some of the redundancy lump sum should be used to pay off the mortgage. But they should keep a float because cash will be useful when setting up a small business. She recommends keeping at least £10,000 of the £37,000 in a savings account.

Ms Storrow says Mr Allen and his wife should put £3,000 into a mini-cash Isa every year. Mr Allen should put £3,000 into a stocks-and-shares Isa and look on this as his new pension.

Solution 2: Pension

Ms Davidson says Mr Allen should put some of his redundancy payment in his pension before he leaves, since this would be tax-efficient.

Mr Connolly says there are potential advantages in Mr Allen transferring his Pfizer scheme, though he should be fully aware of the benefits he is giving up. Ms McLeod should continue with her final-salary scheme but should not increase her Additional Voluntary Contributions yet. They should hold fire until they are fully aware of the financial implications of Mr Allen's redundancy.

Solution 3: Shares

Mr Connolly says Mr Allen has £11,550 worth of Pfizer shares and Ms McLeod has £5,670 worth, based on a price of £21. This means a large portion of their overall portfolio is held in one company, which is risky.

As Mr Allen is able to sell his shares tax-free, he should. Mr Allen and Ms Mcleod should take out a mini-cash Isa for £3,000 each. These tend to offer competitive interest rates, have no tax deducted and in many cases offer instant access. What they do with this money will depend on access they might require and their attitude to risk. Mr Connolly suggests either putting the remaining £5,500 on deposit in case it is required in the short-term or, if they are willing to take the risks, investing in mini stocks-and-shares Isas.

Ms Schooling suggests they put their proceeds from the shares into an Isa using a fund supermarket such as Cofunds, which will enable them to diversify their holdings.

They can start with a broadly based UK fund such as Cazenove UK Growth and Income or DWS UK Growth and then expand their portfolio to other sectors with funds such as Artemis European Growth and LeggMason Investors US Equity.

Solution 4: Insurance

Ms Schooling says since Mr Allen's death-in-service cover will cease on leaving Pfizer, he should take out private life cover. This is needed to look after the children in the event of his death, until they are financially independent. As the youngest is four, the length of cover should be for 18 to 20 years, for a minimum of £150,000. Alternatively , he could consider family income benefit which pays out annually until the end of the term.

Mr Connolly says Mr Allen and Ms McLeod's insurance requirements will centre on protecting their mortgage, their children and their income. They already have a policy to provide life cover to run alongside their repayment mortgage.

The price of life cover has come down substantially so he suggests checking if they can get this any cheaper. But if they pay off their mortgage, this cover will no longer be required and the existing policies can be stopped.

Solution 5: Child tax credits

Mr Connolly says their combined income will now be below £58,000 a year and, as a result, they will be able to claim child tax credit.

He suggests they contact their local Department of Work and Pensions, or go to www.dwp.gov.uk and check if there are other benefits that they can claim.

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