Financial Makeover; When it's time to stop living hand to mouth

Name: Jane Talbot

Age: 52

Occupation: self-employed audio producer

The problem: Jane is considering three issues that she feels require her to change her approach to life: her self-employed income is drying up; she has inherited a flat worth about pounds 170,000; and, finally, given her age, she feels it is time to think about retirement planning. She rents the flat out. Is this sensible? If not, what?

The solution: Continuing to rent the flat does not make sense: the returns are too low. If she sold it and invested the money in other collective funds, she could achieve a higher income.

Jane has, in her own words, "pottered along in a slightly hand to mouth way for many years". But she feels the need for a more structured approach now that her career is beginning to wind down. While in the 12 months to April she earned about pounds 14,000 in freelance earnings, Jane is projecting only about a third of that for the current tax year.

Her annual income is boosted by pounds 2,000 from a parental trust, plus about pounds 12,000 rent from a second property, which she inherited three years ago and is worth about pounds 180,000. She has, however, spent pounds 21,000 to extend its lease, plus a further pounds 20,000 on renovation work.

Jane holds shares in about seven companies, plus Treasury stock, worth pounds 28,000 at the last count. She has pounds 6,000 in cash in five bank and building society accounts; pounds 2,700 in National Savings certificates; a follow-on Tessa worth pounds 7,600; and a Pep, first taken out in 1992, now worth about pounds 6,000.

In addition to her inherited flat, on which she pays more than pounds 4,000 in maintenance charges, insurance and repairs, Jane also owns another house, worth pounds 100,000, on which she has a pounds 26,000 endowment with five years to run and on which her annual outgoings are pounds 3,000 or so.

Now separated, Jane has no financial obligations and her health is good. In addition to normal bills, her only other major expense is some pounds 384 a month spent on a variety of insurance policies. Were she to retire, her pension entitlement after 17 years' service at the BBC would be about pounds 4,000.

As she sees it, the issues she wants to consider revolve around long- term planning for retirement - if she can continue to find work. If not, there's a need for more immediate income.

The adviser: John Edwards, a consultant with independent financial advisers, Berry Birch & Noble, De Salls Court, De Salls, Drive, Hampton Lovett, Droitwich, Worcestershire (01905 775333).

The advice: Jane expects a sharp decline in her income. However, she says that she definitely wants to continue working and will take some other job if her present source of earnings dries up or disappears.

Her present income from the second property, plus the parental trust, is nearly pounds 15,000. However this is subject to annual outgoings of over pounds 4,250 on the flat and is liable to income tax which will vary, depending on the amount of earned income. If she does earn pounds 5,000, her total net income would be around pounds 13,250, after tax.

If so, she would just about have sufficient income to cover her outgoings, disregarding the returns from her shares, cash deposits and the possibility of taking the BBC pension early if push came to shove.

So the main concern is planning for "old age" and generating savings for great nieces and nephews, since she is keen to return some of the money inherited back into the family.

It is worth noting at this stage that apart from the BBC pension, Jane will be eligible for the state pension when she reaches 60. And, in five year's time, the mortgage will be paid off and hopefully she will receive a lump-sum payment from the endowment policy, which she should keep paying into.

The Tessa, which she has just taken out, is fine; so are the National Savings certificates and the amount of cash held in the banks and building societies seems just about right.

There is a question mark, however, over the shares and Treasury stock. I would recommend cashing in at least pounds 9,000 to finance the purchase of a general and single company Personal Equity Plan (Pep) in the last year these are available.

In addition, there is also a strong case for taking at least some of the profits made in recent years from stock market investments just in case there is a setback from the present high levels. It is never wrong to take a profit.

Personally, I would go for one of the protected Peps which provide a minimum return of original capital while the potential benefits are linked to stock market indices. It enables you to invest in the stock market with virtually no risk. The downside is that the money is locked away for a lengthy period, but this fits in with planning for Jane's "old age".

We now reach the really crucial point. Is property a suitable investment for Jane? Her second property, a flat, is currently let for a gross return of pounds 12,960. However, after paying out the maintenance charge, insurance and annual repairs, the gross return is reduced to pounds 8,710. That is a pretty mouldy return of 4.8 per cent gross on the estimated value of pounds 180,000, and it is even worse once income tax is taken into account. Jane could earn a much higher return on the pounds 180,000 - say 7 per cent net - by investing the money elsewhere.

House prices are certainly moving up at present from the disastrously low levels plumbed a few years ago. However, I am far from certain that this is suitable for Jane's circumstances. She already has pounds 100,000 "invested" in her own residence, and with the second property she has the bulk of her eggs in one type of investment, which is distinctly inflexible and is best for providing capital gains rather than income. She is also being pressured to participate in buying the freehold to the whole building, which could be costly.

Selling the flat now, or later, would involve paying capital gains tax. Nevertheless, with proper timing to ensure that she takes advantage of her capital gains tax exemption of pounds 6,800, and allowing for indexation relief and the money spent on the property, the capital gains tax bill should not be excessive.

The tax bill would quickly be offset by the increased returns available from other, more flexible investments, such as unit trusts or investment bonds. Selling the flat would be a pretty radical step, but I think it is an important key to providing more income for her old age with some surplus to pass on to the family.

Finally, I would question why Jane is paying out more than pounds 380 in life insurance policies, as she has no dependents. I would have thought the money could be better spent on paying contributions for long-term care insurance. This would provide further protection for Jane in her "old age" and could avoid her estate being devastated by nursing-home bills.