Personal Finance: Financial Makeover Making allowance for retirement


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.

the adviser:

David Wright, a director of Johnstone Douglas, financial planning consultants of Lennig House, Masons Avenue, Croydon, Surrey, CR0 9XS.

the advice:

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.

FootballGerman sparks three goals in four minutes at favourite No 10 role
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
A long jumper competes in the 80-to-84-year-old age division at the 2007 World Masters Championships
Radamel Falcao was forced to withdraw from the World Cup after undergoing surgery
premier leagueExclusive: Reds have agreement with Monaco
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
Life and Style
Walking tall: unlike some, Donatella Versace showed a strong and vibrant collection
fashionAlexander Fury on the staid Italian clothing industry
Arts and Entertainment
Gregory Porter learnt about his father’s voice at his funeral
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Life and Style
Children at the Leytonstone branch of the Homeless Children's Aid and Adoption Society tuck into their harvest festival gifts, in October 1936
food + drinkThe harvest festival is back, but forget cans of tuna and packets of instant mash
New Articles
i100... she's just started school
ebooksAn unforgettable anthology of contemporary reportage
New Articles
Life and Style
Couples have been having sex less in 2014, according to a new survey
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
New Articles
i100... despite rising prices
Holly's review of Peterborough's Pizza Express quickly went viral on social media
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam