Age: 72 and 70
The problem: Alan, a former senior manager with Unilever, retired some 14 years ago. He and his wife Ella live near Bath. Alan's pension, when combined with investment income and state pensions, allows the couple to enjoy a substantial retirement income. Indeed, they are able to save.
Ella is not interested in the subject of money. Over the years Alan has built up meaningful investment assets in pooled investment funds largely by following his own instincts. However, following advice from a range of publications (not The Independent) Alan invested in a range of emerging market and Far Eastern funds. Of late, market turmoil has made him ask - albeit somewhat tongue-in-cheek - whether he should pull out altogether. But his prime concerns are to produce an investment return 2-3 per cent ahead of inflation while protecting the value of the underlying assets and to ensure that the impact of inheritance tax on his and Ella's estate is minimised.
The Adviser: Martin McMahon, an independent financial adviser at Madison Money Management, a member of the Burns Anderson IFA network. Freephone 0800 0742235.
The Advice: At present, the bulk of Alan and Ella's investments are held in Ella's name as she remains a basic-rate taxpayer. The portfolio is 50 per cent invested in equities and 50 per cent interest-earning investments.
A general rule of thumb is that the older the client, the greater the tilt towards income-generating investments should be. Therefore, I would normally recommend that these clients should be 70 per cent invested in interest earning and 30 per cent equity funds. However, given that they do not depend on investment income to live, a 60/40 balance is reasonable.
Personal equity plans (PEPs) and tax-exempt special savings accounts (Tessas) feature strongly in their portfolio, as do National Savings index-linked certificates, all of which offer tax-free returns. Exposure to the Far East and emerging markets represents only 5 per cent of the portfolio. Therefore my advice would be to stick with that part of the portfolio, particularly as some of the investments have only been in place for a short while. Four to five years is the minimum period to hold any equity-backed investment, given the potential for volatility and buying and selling costs.
The Meacocks also own a flat in London, which is for sale. It should realise about pounds 115,000 and will then become available for investment. Maximising PEP contributions makes sense, as their current holdings have not yet hit the pounds 50,000 individual threshold that will apply when PEPs and Tessas are replaced by the new Individual Savings Accounts (ISAs).
If the property sale takes place prior to the tax year-end on 5 April, they will have an opportunity to maximise their PEP contributions for 1997/98 followed by the 1998/99 contributions. I estimate they could each contribute the maximum pounds 18,000 into PEPs for two years.
The equity portfolio is under-exposed to UK equities. What there is is largely held in privatisation issues and some investment trusts. Given Alan's attitude to more exotic investment opportunities, I would recommend that consideration be given to UK equity growth unit trusts such as Schroder UK Enterprise or Perpetual UK Growth. They could be held in a "wrap-around PEP" such as Skandia's Multipep, which offers access to 17 fund managers and 75 funds.
However, one potential disadvantage of Skandia's option is that it adds another layer of management charges to Alan's investment. Unless he wants to switch in and out of the various funds on a regular basis, it may be quite expensive.
On the interest-earning front, National Savings 11th issue index-linked certificates offer 2.75 per cent plus inflation if held for five years. On a maximum investment of pounds 10,000, all returns are tax free. For the remaining interest earning portion, Northern Rock is offering 7.9 per cent for a minimum investment of pounds 10,000 in the Select 90 account. Interest- earning investments need regular review to ensure that returns are being maximised.
Alan might also consider guaranteed equity bonds. Generally, these are five-year fixed investments with some offering early access to capital. Broadly, they offer a percentage return based on the rise in the FTSE 100, S&P 500 and the Nikkei 300 indices, between a fixed start and finish date. Some focus on one of the above indices, others on a combination.
The risk is that in your particular time frame the indices may fall and all you receive would be a return of the original investment, although one or two recent launches are open-ended.
Alan and Ella are keen to ensure that their estate passes to their children intact. If no action had been taken, following the last of them to die the estate would ben hit with an inheritance tax (IHT) bill of around pounds 240,000.
IHT bites at 40 per cent on the portion of an estate that exceeds the zero-rate band, currently pounds 215,000. As no tax is payable on the estate passing between married partners, it makes sense, where circumstances allow, to pass the equivalent of the zero-rate band to the beneficiaries after the first death. In the Meacocks' case this would save pounds 84,000.
Giving away assets during your lifetime can also make savings. These are known as "potentially exempt transfers" or PETs. Provided the donor lives for seven years, the value of the gift will be discounted from the calculation of the estate.
If death occurs during the seven-year period a tapering scale of charge applies. Alan and Ella have gifted two holiday cottages to their children to take advantage of this concession. However, they must ensure that they do not continue to benefit from the cottages in any way. If they wish to use one for a holiday they must pay a market rent, otherwise the Inland Revenue could decide that they had made a gift "with reservation of benefit" and disqualify it, bringing it back into the estate for IHT calculation.
In 1984 Alan set up the "Meacock Family Trust", taking advantage of rules that applied at the time to reduce the impact of capital transfer tax. A "family trust" enabled assets to be placed outside of the reach of CTT, while the individuals creating the trust could still have access to the income from the assets and control over the investment decisions. With the arrival of IHT in 1986 the rules were changed, preventing those that created a trust from benefiting from the assets.
However, where the trust was in existence prior to the change, the law stands as before. The position today is that if Alan & Ella were to die inside the next three years their estate would face a IHT bill of around pounds 118,000: if they both live for the next six-and-a-half years the bill will reduce to pounds 66,000.
They are also paying into a life-insurance policy that will pay pounds 53,000 on the second death. This is in trust and passes directly to their beneficiaries without hitting the estate. My advice would be to consider increasing the life policy to take account of the additional liability and to consider a six-year term policy to cover the gift period. They might even ask the children to pay the premium.