Personal Finance: Put your nest egg in several baskets

Investment Masterclass NAMES: DAVE AND JOAN WARFIELD AGES: 70 AND 69 RESPECTIVELY OCCUPATIONS: RETIRED

Both Dave and Joan Warfield have retired and receive the state pension. On top of this they each receive another very small pension amounting in total to just over pounds 3,000 per annum, consequently they are non-taxpayers. Fortunately, through careful saving over the years, they have acquired assets in total of pounds 120,000 and it's this that supplements their income. They are cautious investors having been bitten by the stockmarket crash in 1987 and are consequently very well aware of how dependant they are upon their money to produce an income.

At present, they have pounds 30,000 in the building society, pounds 20,000 in a Royal & Sun Alliance with-profits bond, pounds 20,000 in equities, two ISAs - recently taken out to generate an income but with underlying guarantees. The remaining pounds 36,000 has just matured from a collection of National Savings investments. Having considered the return that National Savings offer, which is low, they have decided to look elsewhere.

The adviser: Tim Cockerill is managing director at Whitechurch Securities, independent financial advisers, in Bristol (0117 9442266).

The advice: Mr and Mrs Warfield's main concern is producing an income while still enjoying security of capital. The higher the income the investment can produce, the better. But all products that produce a high level of income carry a higher level of risk. They have decided they do not want to reduce the amount of money in the building society because this gives them a big comfort factor and they have some work to do on the house which they will use some of this money for.

Their with-profits bond is good quality, a nice safe secure investment which has generated very good returns for them over the years. The two ISAs, both with HSBC, are paying a fixed 7.5 per cent, but they do have a limited life and are dependant for the return of the original investment on the performance of the FTSE 100 Index.

The pounds 20,000 invested in equities is in quite high-risk holdings, M&G Geared Income units and Jupiter Enhanced ordinary shares. Both of these are split-level investment trusts. Dave and Joan were guided to invest in them by another adviser and, I have to say, although they are high risk they do serve the purpose of generating a high income. At the time that Dave and Joan bought them, the income was in the order of 10 per cent gross. The positive side of this investment is the income and also the potential for capital growth. The down side is that in poor market conditions the value of the investment could fall quite substantially although, hopefully, the income will remain constant. Given these equity holdings and their two ISAs I feel they have quite sufficient exposure to the market.

Dave and Joan have limited choice given their requirements. They could opt for more money invested in a with-profits bond from which they could take an income of, say, 6 per cent net. Unfortunately they are not able to reclaim the tax on this despite being non taxpayers. This is actually an interesting point because there is a natural tendency to pick investments which pay income gross, or net of tax, so that the tax can be reclaimed in order to maximise personal allowances. However, I think it is very important that tax efficiency is not given priority over the actual level of income which products generate and the needs of the client. It is better to have 7 per cent net income on which you cannot get the tax back than 6 per cent gross.

Another product which I would suggest the Warfields consider is the new AIG (American International Group) Guaranteed Stockmarket Bond. It is paying 8 per cent net income over four years and will return your capital providing the FTSE 100 is at the same level, or higher, than it is at the start of the bond's life. This therefore does not come "risk free" but the level of risk is very small. Another positive factor is that the return on the AIG bond is greater than Dave and Joan were receiving on their National Savings.

I would therefore suggest that Dave and Joan split the pounds 36,000 between a with-profits bond and AIG. I would place pounds 20,000 in the Prudential with- profits bond and pounds 16,000 in the AIG Guaranteed Stockmarket bond. This will give them the level of income they require and security of capital as well. Overall, their investments are well balanced, albeit erring very much on the cautious side with the exception of the holdings in split- level trusts.

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