Winding down to our retirement

Financial planning: Paul Gauntlett offers advice on whether Peter and his wife could retire early and how they should invest his redundancy money

The question:

Peter is a 48-year-old television journalist who is being made redundant by the company he has worked for since 1987. He was earning pounds 40,000 a year.

His redundancy package, well above the statutory minimum, is worth about pounds 43,500. Peter is married, with two children aged 12 and 17. His wife, Susan, works part-time as a newspaper sub-editor, earning pounds 20,000 a year.

The couple have a house in London, with a pounds 95,000 variable-rate mortgage backed by an endowment policy taken out in 1989. During his time at the TV company, Peter was a member of its well-managed money-purchase pension scheme, into which he contributed 6 per cent of his income. The company paid in another 4 per cent.

Peter has been saving very hard in the past year and now has about pounds 5,000 in a 90-day building society account. He also has a separate Tessa account worth pounds 11,500 when it matures shortly. Last year, Susan's father died, leaving her pounds 30,000. This is in a two-year guaranteed account in her name, paying 7.85 per cent gross, and it will mature in April 1997.

Peter would like to find another permanent job at his salary level but will freelance for as long as necessary. He is tempted to begin winding down his career, so that he can finally retire at 55 or slightly later, but does not know if this is possible. Susan, who is five years younger, also plans to carry on until she is 55. She could work an extra weekly shift, earning a further pounds 6,500 a year. She has had a personal pension for the past five years, into which she pays 5 per cent of her income.

Both the children are at state schools. Simon, the oldest, is planning to go to university and the youngest will probably follow.

What financial planning advice would you give Peter and Susan?

The answer:

Peter will need to consider any financial planning that may be appropriate before he is actually made redundant. This could include:

securing a continuation of his life cover, which was previously four times his salary;

taking up any options to continue private medical cover without having to provide fresh medical evidence;

paying maximum AVCs into the pension scheme for the current tax year;

the first pounds 30,000 of his redundancy package is tax-free. If he is confident he can afford it, he could ask his employer to pay part of the remainder into the company pension scheme where it, too, will be tax-free.

If a widow's pension was provided as part of the death in service cover, Peter may wish to take out some temporary life cover to make up for the loss of this. If he remains freelance, longer-term life cover may best be provided under a personal plan with the benefit of full tax relief on the premiums payable.

Next Peter should consider how to improve income or reduce outgoings until he is able to establish acceptable earnings once again. In view of the capital available to him it seems unlikely he will qualify for any state assistance.

His options would be:

to claim on any redundancy protection insurance that he may have taken out in respect of his mortgage or any other loans;

to consider switching the mortgage to a fixed rate while interest rates are favourable to cap his potential outgoings in the future;

to vigorously examine all expenditure, set a fresh budget and plan to live by it until he has a regular stream of sufficient freelance work. In view of the level of the mortgage it is clear that Susan's income alone will not be sufficient for the family to live on - even if she does take on the extra weekly shift.

As an absolute emergency measure, Susan could, in addition to taking on the extra shift at work, take a premium holiday under her personal pension plan until things improve. Before doing so, she should investigate any penalties or loss of cover as a result.

If no work comes Peter's way, the redundancy package may all be required to subsidise daily living costs and so cannot be tied up. It should probably be in a deposit in Peter's name. If it is held in Susan's name, it is more likely to attract higher-rate tax when she takes on the new shift and pushes her income over the basic-rate threshold.

Once Peter has established a good level of income again, longer-term decisions can be made for this cash, including tax-efficient investments such as a Tessa for Susan, National Savings Certificates, PEPs or it could be invested to provide for his son's university education.

Turning now to the existing investments, Peter should defer the decision on whether to roll over his maturing Tessa until the end of the six months he is allowed, so that this capital is left as liquid as possible in case it is eventually needed to subsidise living expenses. A decision regarding Susan's investments will need to be deferred until April 1997 when the fixed-rate deposit matures.

Neither Peter nor Susan has been paying sufficient into their pension plans to allow them to retire at 60 on a decent income, let alone at 55.

Once earnings allow, both Peter and Susan will, therefore, need to maximise their ongoing pension contributions. This will require considerable sacrifices in other areas and possibly even trading down to a less expensive house and reducing their mortgage.

Peter should obtain full details of the paid-up pensions under all his previous schemes and have a projection prepared of his likely income, in real terms, to ages 55, 60 and 65 to enable realistic future funding targets to be set. A professional assessment of all former pension schemes should be obtained.

Unfortunately, costs will be incurred by transferring them to a new pension provider. Peter should work from the premise that transfer is unlikely to be a good idea until it is clearly proved otherwise. In the meantime, his current pension scheme benefits should be left where they are since they are well managed.

The writer is a director of Milton Keynes-based independent financial adviser Moores, Marr, Bradley.

Start your day with The Independent, sign up for daily news emails
Life and Style
A monstrous idea? Body transplants might no longer be science fiction
Science An Italian neurosurgeon believes so - and it's not quite as implausible as it sounds, says Steve Connor
Sport
Demba Ba (right) celebrates after Besiktas win on penalties
footballThere was no happy return to the Ataturk Stadium, where the Reds famously won Champions League
Arts and Entertainment
Natural beauty: Aidan Turner stars in the new series of Poldark
arts + ents
News
Mia Freedman, editorial director of the Mamamia website, reads out a tweet she was sent.
arts + ents
Have you tried new the Independent Digital Edition apps?
News
people
Arts and Entertainment
The write stuff: masters of story-telling James Joyce, left, and Thomas Hardy
arts + ents...begging to differ, John Walsh can't even begin to number the ways
News
Image from a flyer at the CPAC event where Nigel Farage will be speaking
news
Finacial products from our partners
Property search
The FCA has today issued a consultation paper on its plans to tighten up consumer credit rules to give consumers greater protection on guarantor loans and in other areas

Payday loan companies must publish their rates, says CMA

A 20-month investigation concluded that a lack of price competition between lenders has led to higher costs for borrowers

Vulnerable consumers are defined as those with poor literacy skills, those who have caring responsibilities, people with disabilities, dementia or the old

Financial companies are not meeting the needs of vulnerable consumers, says City Watchdog

The Financial Conduct Authority said the industry needs to start thinking about solutions to these challenges

The FTSE 100 is inching closer to its record high but can it maintain these levels?

In 1999 stock markets quickly tumbled, losing many a fortune in the process

Tax-free savings: Freedom dawns for the junior savers caught in low-income accounts

The parents of six million children stuck with low-interest saving accounts worth more than £5bn will be able to move the cash from this April. But what are their options? Samantha Downes reports

How much lower will mortgage rates go?

Another day, another cut. As lenders compete to offer the cheapest deals, Simon Read asks if borrowers should jump in now or wait for further falls

Are bills ruining your family life? Try the lover's guide to coping with debt...

If you're in the red and can't find a way out, it's time to get some help. Neasa MacErlean hears that relationships will suffer unless you are open with your partner, but there are organisations that will put you on the right track and get you talking

How to complain: From retailers to energy suppliers, it's easier than you think

When companies let us down, millions of us just take it on the chin. Simon Read shows how to make your voice heard

The dark side of debt: Descending into financial desperation is not due to self-indulgence

Three stories reveal financial desperation that was born of other, serious concerns, from being a victim of sexual assault, to losing a family member
The Financial Conduct Authority took the unprecedented step of making Wonga cancel the outstanding debt of 330,000 borrowers and scrap the fees and charges of 45,000 more

Wonga escapes prosecution after sending fake threatening letters to struggling borrowers

The City of London Police’s investigation into Wonga was scrapped because 'there is not sufficient evidence to progress a criminal investigation'

Thousands of UK investors could lose out following collapse of Secured Energy Bonds

The collapse of an Australian company that sold energy bonds in Britain demonstrates the dangers of leaving the beaten track, says Simon Read
Thorn in our side? Some in the pension industry are warning of chaos in the run-up to 6 April

Simon Read: "Pension freedom is months away but if we don't act soon, the freedom may be to make an expensive mistake with our future"

The introduction of the new pension freedoms has been "alarmingly chaotic", reckons Nigel Green, chief executive of the financial consultancy deVere Group, He said this week: "The implementation of changes appears to be being rushed in a cynical attempt to woo older voters ahead of May's election."

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Telesales / Marketing Executive - B2B - OTE £25,000

    £17000 - £25000 per annum: Recruitment Genius: An opportunity to join this new...

    SThree: Trainee Recruitment Consultant

    £18000 - £21000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Recruitment Genius: Business Control Manager

    £36000 - £44000 per annum: Recruitment Genius: Encouraging more businesses to ...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower