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.