Ways of getting a little extra beyond the Halifax

FINANCIAL MAKEOVER; Ms Wilson should ask the adviser why he feels high-income bonds are a better deal than PEPs
Tricia Wilson is 57, retired, and divorced. She mainly lives off savings and pensions, although she also does nine hours of paid work a week for a charity, for which she gets around pounds 39. The pensions and savings comprise the following: pounds 4,370 a year after tax from a Britannia Life pension, pounds 2,160 from a Standard Life bond, pounds 2,120 a year from an annuity with Clerical Medical, and the interest on more than pounds 60,000 of savings in a Halifax Bonus Gold account.

Tricia also has pounds 9,000 of savings in a second-generation Tessa with the Halifax, and pays pounds 265 a year into a Scottish Amicable pension plan, due to mature in three years when she reaches 60.

Tricia owns her flat in Cheltenham, which has running costs amounting to around pounds 2,400 a year.

Ms Wilson reckons that if she watches her outgoings carefully, she has enough money to do the things she wants: eat out with friends, go to the theatre, rent a holiday caravan in Pembrokeshire every year, and even visit her son in Hong Kong. But in fact she is spending around pounds 1,300 more than her total income every year. Is there a way of raising her income without reducing her capital (which once reduced will be even harder pushed to produce a decent income)?

What does a financial adviser recommend?

Ms Wilson's income shortfall could be seen as a relatively short-term problem as in three years' time she will get her state pension and her Scottish Amicable plan will mature. In addition, she is set to become one of the biggest beneficiaries of the coming Halifax windfall as her pounds 60,000 of qualifying savings should mean shares worth pounds 5,000.

However, these Halifax savings are currently earning interest of less than 4 per cent net of tax. Ms Wilson could withdraw the vast majority of her money now without jeopardising the windfall, although she must continue to keep a qualifying account open until pay day (expected to be in June). To be sure, she might prefer not to touch her money until she gets her shares. This conservative approach is recommended by the adviser who examined Ms Wilson' finances.

He notes that when Ms Wilson does feel happy moving her Halifax savings she should shop around for accounts offering higher rates, perhaps because they are operated by post or because withdrawals can only be made after a period of notice. He advises that as she wants to live off the interest, Ms Wilson should be sure to check that any account would pay interest monthly, as not all offer this service. Woolwich, for example, is offering 6.2 per cent (5 per cent net) on savings balances of pounds 25,000 to pounds 50,000 in its Postal 60 account, where 60 days' notice is required. He suggests that she could put half her pounds 60,000 in a savings account of this type and the remainder into investments that will offer higher returns, albeit at higher risks.

For example, it is possible to receive an annual "income" of 10.2 per cent net of basic-rate tax from a high-income bond that would tie up pounds 10,000 for five years, giving her a monthly income of pounds 82. The catch to this is that for Ms Wilson to receive her pounds 10,000 in full at the end of the five years, the UK and German stock markets must both be at least as high as they were when the bond was taken out. With stock markets looking as fragile as they do at present, there is a possibility that she will not get her pounds 10,000 back in full. Although it would be very unusual for the UK stock market to be down over a five-year period, the risks are increased in this case because there are two stock markets to be considered.

The bond, from GE Financial Assurance, offers a minimum return at the end of the five-year investment period of the pounds 10,000, less the "income" payments that have already been paid.

The Halifax shares Ms Wilson is due to receive are a more straightforward investment. There is no reason to think that they will not give a better return than a deposit account over the longer term. Even over the shorter term the dividends could keep pace with the interest she could otherwise get on the money, especially if the shares are held tax-free in a PEP.

The adviser recommends a relatively low-risk distribution bond for the rest of her savings. These bonds invest in income-oriented investments such as gilts and generate income half-yearly. Current half-yearly distributions are worth 2.6 to 2.95 per cent net of basic rate tax. He notes that over the longer term the bond should also provide some growth in that income.

However, Ms Wilson should quiz the adviser as to why he believes this and the high-income type of bond are better than PEPs (even though these are limited to an investment of pounds 6,000 a tax year) or unit trusts, in view of the fact that he recommends two investments (the high-income bond and distribution bond) that stand to earn him more commission than from many PEPs and unit or investment trusts.

It is also worth noting that Ms Wilson stands to gain from the impending takeover of Scottish Amicable, the mutual insurer with which she has a pension. She should receive a good windfall payment from this and, with her plan maturing in three years, she should escape before any possible negatives from the takeover come through.

q Tricia Wilson was advised by Peter Lawson, a partner of Acorn Financial Planning, an independent financial adviser based in Cheltenham.

If you would like to be considered for a financial makeover, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL. Please include details of your current financial situation and state why you think you need a makeover.

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