Joe is married. He lives in Yorkshire and has worked for British Aerospace since 1969. In that time he has built up a respectable pension entitlement plus an investment portfolio, with the aim of retiring in five years' time, when he will be 61.
In addition to the pension benefits he is fully protected in terms of Death in Service cover and Private Medical Insurance, and has no need for income replacement (PHI) protection in the event that he loses his job or cannot continue working.
He still has a mortgage of pounds 49,000, which is split between an interest- only loan of pounds 28,000 backed by an endowment policy and a capital and interest (repayment) loan of pounds 21,000, which is due to be repaid by June 2005, while his property is presently reckoned to be worth pounds 100,000.
Joe wishes to review his investment portfolio and pension with the aim of maximising his income after he has retired.
David Wright, a director of Johnstone Douglas, financial planning consultants of Lennig House, Masons Avenue, Croydon, Surrey, CR0 9XS.
Your pension is in good shape. It is a final salary occupational scheme which, with your employer's permission, allows you to retire at age 61, without penalty. After 34 years with the same employer you are projected to receive a pension of approximately 56 per cent of your final salary and you have been building up additional voluntary contributions (AVCs) into the employer's pension fund over the past few years by paying in pounds 200 each month and topping up your total contributions to the maximum permitted level of 15 per cent of salary at the end of each year with a lump sum, utilising part of your annual bonus payment.
While the retirement income this produces unfortunately will be taxable, you are currently receiving 40 per cent tax relief on your contributions and tax-efficient growth within the additioanl voluntary contribution plan, and I recommend that you continue to maximise your contributions.
I have reviewed your investment portfolio, which is split between yourself and your wife Ann, and I consider that your existing PEP and unit trust holdings are all invested with strong companies in suitable, well-performing funds. I would therefore not recommend that you make any changes at this stage, but simply keep matters under regular review. It is never easy to anticipate changes in the stock market, but the long-term trends should be upwards and you are under no particular pressure to realise these investments.
You also have about pounds 22,000 held on deposit in Ann's name, of which pounds 10,000 becomes available from a maturing Abbey National Bond in October this year, and you are willing to make a further pounds 5,000 available for investment.
I recommend that you both make full use of your Personal Equity Plan allowances for the current tax year and invest pounds 12,000 between you to benefit from tax-efficient growth over the next five years, thus increasing your total portfolio of PEPs to provide further tax-free income in retirement independently of your pension.
To provide a balanced approach, I recommend using different PEP providers than the companies you have previously invested with. The Schroder UK Balanced Growth PEP combines three of Schroders' best performing funds, providing a balanced approach to investment with a leading PEP manager, and a competitive charging structure.
Most investment managers consider Europe to be a particular growth area currently, and I also recommend the Invesco European growth PEP to add balance to your current portfolio. You will notice I believe that growth funds are more suitable for your needs than investments targeting mainly dividend income.
The decision of whether to retain your mortgage or use capital to reduce the mortgage outstanding is often a matter of personal preference. There are still some tax advantages to retaining a mortgage of up to pounds 30,000, and if the return you can earn on your investments exceeds the interest on your mortgage you will retain flexibility, without sacrificing income.
Mortgage rates are currently higher than the average dividend on share portfolios, but investments should achieve some capital growth over time, and there would only be a strong case for paying off the mortgage if mortgage rates rose sharply and net dividends on your investments fell.
As your mortgage is due to be repaid after your intended retirement age of 61, and as you would not currently have a redemption penalty to pay on your existing mortgage, I would suggest considering a remortgage to take advantage of one of the many mortgage offers currently available, and reviewing the position in five years' time. Most of these offers require a penalty for repayment within five years but you still have time to avoid these penalties without extending the date at which your existing mortgage is to be paid.
I would recommend investing the balance of pounds 3,000 into a unit trust in your wife's name, and to continue to save on a monthly basis an amount that you find comfortable at present. The situation can then be reviewed in April 1999, with a view to putting the money into a tax-free Individual Savings Account to complement your existing PEPs.
Overall, your existing arrangements are in very good order, and by utilising those tax-efficient investment allowances available to you both over the next five years you should be able to maximise your income and capital in retirement.