Wealth Check: 'I want to protect my retirement nest-eggs from financial storms'

Sean Worth, 53, lives in Welwyn Garden City, Hertfordshire, with his wife, Marilyn, and their 23-year old son. The couple have a comfortable standard of living and have been sensible in preparing for the future. However, Sean is keen to protect their nest eggs from the financial crisis. "I'm not sure how to invest before my retirement," he adds. "I don't know whether to continue to invest in share-based units in my stakeholder pension or if I should put my money into something different altogether."

Case notes

Income: A combined £80,000 a year.
Joint monthly outgoings: £1,850 tax and National Insurance, £1,200 living expenses, £735 loans, £650 pensions, £500 savings, and around £3,600 on annual holidays.
Pension: Sean pays 9 per cent of his salary into a stakeholder pension, and holds a local government pension with 30 years' service.
Joint Savings: £28,000 in ISAs
Mortgage: Tracker, currently at 3.5 per cent, has another seven years to run.

This week, three independent financial advisers assess Sean's options: Ian Hudson of Hudson Green & Associates, Keith Churchouse of Churchouse Financial Planning Limited, and Chris Wicks of N-Trust Group.

Pension

Ideally, Sean would like to stop working full-time in 2015, at the age of 60, but he'll need to be sure he can. "As Sean wishes to retire five years before the state pension age, he'll need to be sure he can make do so with the resources available to him at 60," warns Chris Wicks.

Sean has the benefit of being able to begin receiving his local government pension, frozen in 2004 after 30 years of service, in 2015. However, he might be willing to work part-time until 65 to supplement this. He also has a stakeholder pension, into which he currently pays 9 per cent of his salary. He would ideally like to maintain his current standard of living when he retires and hopes to receive about 40 per cent of his final salary – perhaps a net total of £25,000 – in retirement.

"Sean's local government pension will be index linked, which means it is likely to keep pace with the standard of living he retires on," says Ian Hudson. Nevertheless, the advisers question whether or not the combined payments of Sean's pensions will match the figure he hopes for.

Keith Churchouse says Sean could choose to combat a possible shortfall by using some of his surplus income to increase his future benefits. "This would be valuable because he will receive higher rate tax relief, currently 40 per cent, on his contributions, but will only be a basic-rate tax payer in retirement, paying 20 per cent. If Sean does decide to increase his pension contributions, this should be paid into his existing Stakeholder Pension Plan to keep costs and risk low. This would be highly tax efficient for a higher-rate tax payer and I suggest that he considers adding an additional £450 per month net to his existing plan. This would provide a gross payment of £560 per month, but entitle him to extra tax relief of £110 per month through his tax return."

Wicks says that if Sean finds he cannot afford additional contributions to make up for a potential shortfall, he has two choices. "He'll need to choose between reducing the level of income targeted and adopting a higher level of risk," he says.

Savings

Hudson estimates that Sean, who sees himself as a cautious investor, will receive about £75,000 of tax-free cash from his pensions, which could go towards the couple's regular savings. "They can use this in one of two ways," he says. "Simple, but blunt, investment bonds, or complex and more expensive, but more tax-efficient OEICs (open-ended investment companies), investment trusts or gilts."

But Sean shouldn't ignore equities, Hudson adds. "Corporate bonds, many of which are showing great value right now, could play a big role," he says, "And gilts, which are effectively government bonds, also offer a safe and solid return."

However, with Sean's caution in mind, Churchouse believes the Worths should use their maximum ISA allowances by each month putting £300 into a cash ISA, along with £150 into premium bonds. "This will maintain flexibility if capital is needed," he says. "And any winnings are tax-free, which can be valuable for a higher-rate tax payer like Sean. With deposit rates and interest returns falling, this could be an effective investment."

Insurance

Sean says he has no insurance cover, but Churchouse recommends checking what benefits he receives from his employer. "They are likely to pay his salary for a term defined in his contract and may also provide death in service cover," he says, "If not, he should consider both covers. As he is the major earner, protecting Marilyn should be a priority.

"Life assurance will cost around £30 a month," he says. "This is not a lot for peace of mind. Any new policy should be written in trust to place the funds outside the estate to avoid inheritance tax."

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