When diversity breeds security

FINANCIAL MAKEOVER

Valerie Cornish is a 55-year-old divorcee who is keen to ensure that she has enough income to live on in the future. Having worked with her ex-husband for many years, she has accrued pension funds valued at pounds 116,000 and building society deposits of pounds 157,000. She lives fairly modestly, managing on the income from her building society deposits, currently amounting to pounds 10,000 per annum after tax.

She wants to know if she should diversify her investments and how she should plan now for the long-term future. She particularly wants advice on how best to invest the pounds 140,000 she has on deposit with the Woolwich Building Society in a three-year fixed-rate bond, which matures in October this year. Valerie has no liabilities.

What a financial adviser recommends:

Because interest rates have fallen since the investment in the three- year bond was made, obtaining the same level of income purely from a deposit- based investment will not be possible when the existing bond matures. As Valerie is only 55 it is important to consider ways of achieving a growing income from capital, to help supplement her income in retirement.

This can be achieved by investing in equities and fixed- interest securities. While income levels start lower than those available from deposit-based investments (and equity levels can fall as well as rise), the capital values will tend to increase over time, and so will the income generated.

I would suggest around 40 per cent is invested in this way. As far as investment risk is concerned, Valerie has a fairly balanced view, erring on the cautious side. I recommend a good "conservative" portfolio manager (such as Rothschilds) to choose a portfolio leaning towards producing income rather than capital growth.

A manager will be able to determine an investment strategy with an appropriate split between shares, fixed-interest stocks and cash deposits, take care of collecting dividends and issue regular "progress reports".

Alternatively, investment with a selection of successful fund management teams - such as Jupiter, Perpetual and Credit Suisse - may be a slightly cheaper method but will be more administratively burdensome and potentially a little more volatile.

A typical opening yield for an income portfolio of this type of investment would be around 4 per cent per annum. Although low initially, this should provide a growing supplement to Valerie's pensions in later years.

I would also consider investing a significant sum in a with-profit investment bond which distributes a good after-tax income and is relatively low risk.

Her remaining capital can be retained in high-yielding deposit accounts such as her Bristol & West account, which is currently offering 6.22 per cent gross interest with easy access. This would provide a sizeable emergency fund. To achieve a high rate of return with instant access she should consider an account with Sainsbury's Bank, now offering 5.75 per cent gross.

From the tax point of view, it will be worth considering an investment in corporate bond PEPs which pay tax-free dividends. Ideally they should be held over five years, and the amounts invested are limited to pounds 6,000 per annum.

Valerie should invest the maximum amount allowable in her Woolwich Tessa account. Remember that interest can be taken from a Tessa if required.

Valerie's pension funds total pounds 116,000 now and, assuming fairly modest growth, will be augmented by her state pension to provide an income of around pounds 14,000 per annum at the age of 60. This should provide a reasonable long-term level of income after allowing for inflation.

Valerie should at some stage consider buying a Long Term Care Bond, which is a lump sum investment to provide an income in the event of her needing long-term care.

Valerie's current will is no longer appropriate following her divorce and she should consult her solicitor to update it.

She will qualify for shares in the Woolwich when it floats. These can be held in a PEP if required, to provide tax-free dividends.

q Valerie Cornish was talking to Graham Bacon of GB Financial Management, an Essex-based independent financial adviser and a member of the UK's largest provider of independent financial advice, DBS Financial Management.

If you would like to be considered for a financial makeover for publication, 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, a daytime telephone number, and state why you think you need a makeover.