Wealth Check: 'My Navy cash isn't a drop in the ocean'
Each week we give 'Independent on Sunday' readers a financial makeover
Sunday 19 September 2004
Alex Macrae, 40, has joined Civvy Street as an engineer after 22 years' service with the Royal Navy. But he must still deal with a legacy from his sea days: what to do with his £48,500 pay-off from the Navy.
"Should I use some of this to reduce my monthly debt outgoings or invest the whole lot in the hope that, if done wisely, it may produce a substantial sum by the time I retire?"
His wife, Rachel, has just qualified as a teacher and the couple have two children, Callum, nine, and Harriet, seven. The family expects money to be tight.
"We could resolve this by either extending the mortgage by five years or by using some of the grant to pay off a large slice of the mortgage," says Alex.
"On the other hand, I am also considering investing the bulk of the Navy payout in shares."
The couple have built up £2,500 worth of savings in Nationwide's e-savings account and £5,500 in Scottish Widows' UK equity income fund. There is also £5,000 in a Legal & General (L&G) income fund individual savings account (ISA), to which they add a further £250 a month.
Alex has just started receiving an annual pension of £8,500 from the Navy. He has also been investing in additional voluntary contributions (AVCs) for 14 years with Abbey Life, and plans to do so until he is 55. But his new employer is offering a stakeholder pension with L&G. "I wonder if I can pay into my Abbey Life AVC fund as well as the stakeholder?"
Rachel has yet to invest in a pension but has built up £1,500 in a Nationwide mini equity ISA.
The couple recently moved to Warwick, taking out a £125,000 mortgage on a £280,000 house. They have a tracker loan with Nationwide offering 0.4 per cent above the base rate for two years.
As for insurance, they have an Abbey Life plan giving £50,000 joint cover for a £27.50 monthly premium. Alex also has an AXA with-profits endowment policy providing £35,000 worth of cover to the age of 65, when a lump sum will be paid out.
Interview by Sam Dunn
Alex and Rachel Macrae from Wellesbourne, Warwick.
Jobs: Alex is a Serco defence engineer, Rachel a newly qualified teacher seeking full-time work.
Savings: £2,500 in an online savings account with Nationwide.
Investments: £5,500 in a Scottish Widows unit trust, £6,500 in stocks and shares individual savings accounts.
Goal: to find the best use for Alex's £48,500 Navy payoff.
The Navy grant should be split and used for different financial goals rather than targeting just one priority, says Philippa Gee of independent financial adviser (IFA) Torquil Clark. At least half the sum should be used to repay a chunk of the mortgage.
Kevin Anderson of IFA Budge & Co suggests Alex should also leave some of the money in an instant access account for emergencies.
Ben Yearsley of IFA Hargreaves Lansdown says it might be worth waiting until Rachel has found a job before they act, leaving the cash in the Nationwide account instead.
Alex won't be allowed to put money into a mini cash ISA this tax year since he is already investing in a maxi equity ISA with L&G, says Mr Yearsley. However, up to £3,000 of the Navy cash could be invested in a mini cash ISA in Rachel's name.
Both he and Ms Gee recommend Abbey's postal ISA deal. This offers 5.35 per cent and guarantees to be at least 0.5 per cent above the base rate until 1 April 2005.
It's also worth considering Yorkshire building society's cash ISA, which pays 5.2 per cent, adds Ms Gee.
The Nationwide account should be topped up to between £5,000 and £10,000 for "rainy day" savings, advises Mr Anderson.
Using much of the grant for direct investment in shares would probably be too high risk, says Ms Gee. In any case, Mr Anderson believes that the L&G and Scottish Widows funds are both "excellent performers".
However, Mr Yearsley disagrees: "Alex is in the right kind of investment [income funds] but not in the right funds themselves; neither [of the above companies] would be my first choice for equity investments." The Invesco Perpetual, Jupiter or Artemis Income funds are worth considering instead, he says.
Alex should stick with the AXA endowment policy, adds Mr Anderson.
With signs that interest rates are near their peak, a tracker loan is a sensible choice, says Mr Yearsley.
Subject to penalties, Alex should consider using up to half of his Navy payout to reduce the mortgage, says Ms Gee. "The one proviso is that any money saved be invested elsewhere to build up his [savings] again."
Mr Anderson says they could then consider overpaying on their loan when Rachel secures a full-time job.
Since Alex is no longer part of an occupational pension scheme, he won't be able to invest in the Abbey Life AVC fund, says Ms Gee. He should consider switching the AVC premiums into the stakeholder, particularly as his employer will match his contributions.
Mr Yearsley agrees, saying Abbey Life's track record has been "moderately awful". If the penalty isn't too high, Alex might also want to transfer his money from this fund into the stakeholder plan.
With any pension transfer, it's worth visiting a specialist IFA for advice.
Rachel should join the pension scheme for teachers when she gets a job, adds Ms Gee. "However, if it takes longer to find the right post, it may be worth considering a stakeholder [in the meantime]."
The couple's mortgage is not adequately covered by their current insurance, warn our IFAs. Since the cost of simple life cover has been falling, they can, in effect, get twice as much insurance for the same price. L&G offers £125,000 joint cover up to the age of 65, for £30.88 a month, says Mr Yearsley.
If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email firstname.lastname@example.org
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Mark Dampier: An infrastructure fund that builds returns by taking different roads
Simon Read: Timeshare owners accuse Macdonald Resorts of land grab
Donald MacInnes: Let's pretend Scotland won and now a salmon is running the country
Five Questions: Changes to car tax discs
Bargain Hunter: Win a new iPhone 6
- 1 Scottish referendum: So how about the English now being given a chance to split from England?
- 2 Friends 20th anniversary: Alison Jackson photographs reunited cast
- 3 Friends 20th anniversary: The highs and lows of the cast's careers since 2004
- 5 Free U2 album: How the most generous giveaway in music history turned into a PR disaster
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Scottish independence: The Queen breaks silence on referendum debate – as think tank warns of £14bn black hole if Scotland votes Yes
iJobs Money & Business
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...
Day In a Page
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize