Retirement plans

Tess Powell wants to sell her houses and boost her income

NAME: Tess Powell

AGE: 66

OCCUPATION: Part-time employee with the Ancient Monuments Society

PROBLEM: Tess Powell is property-rich but cash-poor. She owns a property in London valued at around pounds 250,000 and is in the process of selling a house in Spain worth pounds 30,000. Neither is mortgaged.

Aside from pounds 3,500 in a savings account with Cheltenham & Gloucester, she is not a member of an employer's pension scheme and does not have any private pension arrangements, although she receives pounds 9,000 in rental income from a studio formerly owned by her husband, now dead. Tess is looking to sell her main property and buy a smaller one near London. Together with the proceeds of her Spanish property sale, this would give her up to pounds 140,000 to invest, depending on the exact sale and re-purchase prices.

She aims to retire in October and will need gross income from the investment of between pounds 10,000 and pounds 12,000 a year. Tess is risk-averse, though she may let a small proportion of her funds be held in assets where some risk is involved.

THE ADVISER: Fiona Price, managing director of Fiona Price & Partners, a firm of independent financial advisers based in London (0171-430 0366).

THE ADVICE: "We have tried to balance the need for low-risk, income-oriented investment, plus a reliable income stream and scope to increase it in future, plus tax efficiency, flexibility and ease of financial `maintenance'.

The first point is that the income requirement is high. Even if pounds 140,000 is available, this will still need to generate around 7-9 per cent gross per annum.

Although higher levels of income can probably be achieved, it can only be done by taking some risks. Secondly, there would be little, if any, scope for the capital value of your investments to grow.

You will therefore need to balance the level of income you require and the cost of the property you wish to buy.

We note that the income required is in addition to the state pension and rental income and that it will be used to replace your current part- time earnings of pounds 8,000. It may be useful to undertake a budgeting exercise to reflect the differences in costs that you have now compared with those in retirement.

Our first recommendation is to hold pounds 10,000 in a building society notice account, in addition to your funds of pounds 3,500 on instant access. Irish Permanent is currently offering 6.6 per cent gross on its 60-day postal account.

We recommend that you invest pounds 8,575 with the Sun Banking Tessa Plus, as it provides the highest fixed rates at present, plus all the money can be invested from the start. This is done by investing the maximum pounds 3,000 immediately. The remainder is held in a parallel deposit account that `feeds' in money over the five-year term. Interest is fixed at 7.55 per cent and the maturity value will be pounds 12,086.

National Savings are government products which can be readily purchased through the Post Office. They are all guaranteed and there is no risk to capital. We recommend pounds 10,000 be invested in the five-year 10th Index- linked Certificate, which will match the rate of inflation, plus an additional 2.5 per cent per annum.

The significant tax advantages of a personal pension mean it provides a better rate of return than any other investment, given that the income available is guaranteed. The amount you invest is automatically uplifted by the tax relief of 23 per cent. You may put up to 40 per cent of your earned income into a personal pension in the current tax year. You are also permitted to `carry forward' any unused contribution allowances from the previous six years, but may not make a total contribution in excess of your earned income for the current tax year (pounds 4,000, assuming that you will be earning for six months only).

You may also make a contribution now and `elect' that it was made last year, hence you can pay a further amount, equal to your 1996/97 earnings.

The contribution is paid net of basic-rate tax. This means that, say, pounds 11,000 may be invested at the cost of pounds 8,400. The idea would be to take the benefits of your pension immediately and convert your fund into an income. Or you can take 25 per cent of the fund as a tax-free lump sum and convert the rest to income. We recommend Standard Life as it operates a scheme geared for this type of arrangement.

We also recommend a Corporate Bond PEP, which offers the prospect of tax-efficient income in a low to medium-risk environment. The main attraction of PEPs is that dividends and interest are free from income tax and there is no tax to pay on gains. You should invest the maximum pounds 6,000 in the Commercial Union Monthly Income Plus PEP, which has a current yield of 7.97 per cent.

With-profits bonds offer strength and stability but with returns linked to equities and other long-term investments. Each year bonuses are added. A terminal bonus is payable at the end, though with some companies a proportion of this is allocated each year instead. Bonuses, once added, cannot be taken away. We recommend you invest pounds 40,000 with Prudential. Its current bonus rate is 6.25 per cent, plus terminal bonus paid from day one, which adds a further 2 per cent per annum.

High income bonds offer monthly or annual payments over five or six years. In addition, the full capital invested is returned at the end of the term so long as the stock market indices have achieved the required level of growth. We recommend that you invest pounds 40,000 in the Safeguard Bond with GE Financial Assurance. This pays 7.68 per cent (in monthly instalments) net of basic rate tax. The stock market index would have to fall by more than 20 per cent over the term of the investment for the full capital not to be returned.

Guaranteed income bonds are a straightforward investment where the income and the capital are fully guaranteed for a set period of time. We recommend you invest pounds 20,000 over a four-year term with Hambro Assured as it offers a competitive annual rate of 6.1 per cent.

The above strategy should ensure a net income of pounds 7,339, equivalent to pounds 9,531 before tax. There is also scope to provide a higher level of income in the future. In particular, no income is being drawn from the building society account, Tessa and National Savings. Furthermore, the full income is not being drawn from the with-profits bond, all of which allows a higher income in the future."