Susan Thompson, 51, from Halifax, seems at first glance to have a pleasant dilemma, thanks, in part, to the economic downturn. Having decided to take advantage of a round of redundancies at work, Susan retired in September. She now has £20,500 to invest thanks to 19 years with the same employer, not to mention a final salary pension scheme worth about £3,000 a year.
"I want to be secure as I get older, and to invest wisely in order to get additional income from the interest on my savings and investments," says Susan. "What I need to know now is what to do with my money."
She plans to continue paid work for three or four more years, but despite her small pension provision and a cautious approach to investment, Susan hopes to retire on about £10,000 a year as well as help sons Daniel, 22, and Luke, 20, get on the property ladder.
"My husband, Stephen, and I would like to downsize our home in another three or four years, when I give up paid work, in order to be able to give my two sons a sum of money to help them purchase their first properties," she says. But can all this be achieved without adopting a high-risk approach to investing?
Susan's retirement hopes seem particularly ambitious until her savings are taken into account. "Luckily for Susan, unlike so many people in Britain, she is not caught in a quagmire of debt," says Darius McDermott of financial adviser Chelsea Financial Services. "Instead, she can look forward to a reasonably comfortable pension." But even with another job, such a defensive approach to investments means Susan must do some careful planning and juggling to make the most of her ready cash and investment income to ensure she achieves her financial aims.
"Susan may find that she can only achieve her retirement income aims by spending her capital – the underlying money rather than the returns it earns – until the couple's state pensions are paid in several years' time," warns Duncan Carter of Clearwater Financial Planning. "In fact, she may need to think about revising either her attitude to risk or her sights for the amount she hopes for. Even so, Susan may find she needs to work for longer to reach her goals."
Savings and investments
The recent injection of over £20,000 to Susan's financial portfolio reinforces an already strong cash position. Both she and Stephen have cash ISAs worth £5,100 – thanks to recent legislation that now allows the over 50s to save this level of tax-free saving every year. Susan also has a 2008 ISA worth £3,600.
Meanwhile, the couple have a fixed rate bond with £35,000 which matures in two years, a web saver account containing £8,000, and a corporate bond fund worth a further £8,000 that has now matured – not to mention current accounts worth £6,500 between them. Meanwhile, cautious or not, Susan and her husband have £22,000 in equity shares in the Lloyds Banking Group. There are even premium bonds worth another £20,000.
"Susan should start by breaking down her financial planning into three phases – the immediate future, medium term, and longer term and retirement," Mr Carter suggests. "While she works on finding another job, I would focus on the shorter-term planning issues. Even though she has plenty of cash savings, Susan should consider keeping her redundancy money liquid and accessible until she knows where her everyday money is coming from. At this early stage, she can't be sure how long she may be out of work and may need to use the capital to help to support her income."
"With her cash buffer in place, Susan then needs to make the right decisions about supplementing her pension with a healthy stream of investment income," Mr McDermott continues. She should review her web saver account to make sure she is getting the best possible rates for her money. Equally, she should keep a close eye on the performance her corporate bond offers and, if necessary, consider shifting that £8,000 to a better performing, flexible fund run by respected managers such as M&G's Optimal Income fund or the Henderson Strategic Bond fund.
"As she is not willing to forgo her aversion to risk, Susan is limited in terms of what she can invest in," Mr McDermott adds. "But there are still a lot of investment products she should be examining. Frankly, premium bonds are not the best option for those looking to boost income as they don't pay a consistent yield. With premium bonds instead of interest payments, investors simply have the chance to win tax-free prizes, which have themselves been reduced recently."
"Diversifying her equity holdings would be a good place to start," he says. "Holding a large portion of your capital in a single stock is about as high on the risk scale as you can get. Susan should move this money into a well-diversified cautious unit trust where she will have exposure to a pool of assets managed by an experienced portfolio manager, such as the Miton Special Situations fund."
And then there is the question of eventually investing the redundancy payout. "Susan's lump sum of £20,000 could be invested in a three-year deposit-based bond," suggests A J Somal of Uniec Financial Solutions. "Barnsley Building Society is currently offering 4.8 per cent gross interest fixed rate on a three-year bond. With Susan's focus on income over the next few years, the fact that she is about to give up work is significant as she will become a non-taxpayer. If she doesn't find or look for further paid employment it may be worth informing her bank to pay the interest on her deposit accounts gross, instead of net."
Susan has decided that the best way to help her children achieve their first steps on the housing ladder is to move to a smaller home to free up some cash. But if the past year has demonstrated anything, it is that there are no absolutes in the property game.
"Susan mentions that she would like to downsize the house in three or four years' time," Mr Somal says. "And this is certainly a tax-efficient method of raising finance. But more research needs to be done when it comes to buying and selling property at the time they decide to put their home on the market, particularly in terms of marketability and the ease with which the property can be sold."
Will and insurance
Susan's decision to take redundancy has other implications. For instance although she has a will, unlike half the population, but now has no personal insurance. Although income protection may no longer be appropriate, Susan and Stephen should look at policies that may help to support their family should something untoward occur, such as critical illness or life cover.
Do you need a financial makeover?
Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF email@example.com