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Early retirement agenda needs a financial boost
By Rebecca Atkinson
The profile
The couple has a Standard Life capital investment bond, currently valued at £12,273, and a with-profits bond worth £13,809. Margaret has £12,455 saved in a Scarborough Building Society ISA, while Damian's Barclays ISA holds £5,350. In addition, Damian and Margaret hold £21,650 worth of premium bonds, and pay £250 a month into a savings account.
Damian has deferred a final salary pension scheme, which will pay £14,614 a year, and his current pension plan is valued at £52,204, plus he has £9,216 from another staff pension fund. The couple also has a joint whole life investment bond with Standard Life, currently valued at £20,155.
Ideally, the Winfields would like to retire early - in about seven years - and want to buy a new car and caravan, for which they would need £30,000. "Our money is currently divided into several different areas, some of which have performed better than others," says Damian. "We want to know if we should continue with this strategy or pool our investments into a secured bond with a possible monthly dividend."
Pension arrangements
Damian's deferred final salary scheme will give him a pension of £14,614 once he reaches 65, but he could opt to take out a lump sum in cash of 25% and receive a reduced income instead. The benefit of doing this is that the lump sum would be tax-free.
"Most people find they're better off, after tax, when they take the lump sum. And there's often a feel-good factor attached to knowing you would have access to cash in an emergency," says Heath. However, he points out that if Damian draws on this pension before he's 65, benefits would be deducted for every year of his early retirement.
Although Damian's pension scheme has no penalty should he choose to retire early, Heath is concerned that it is invested in with-profits. "This type of fund has proven to be a safe haven as it can smooth investment returns over these volatile times," he explains. "However, it's worth noting that stockmarkets are a lot lower than they were 12 to 18 months ago."
Given the Winfields' medium attitude to risk, Heath recommends that they switch their investments into more suitable funds.
"They could switch to undervalued funds that have plenty of growth potential over the next five years," says Heath. "His employer's contributions would also benefit from lower asset values, so he'll be able to buy more investment units as the markets recover."
As with any investment decision, the funds should be reviewed at least once a year to ensure they're still performing well and that the couple's attitude to risk hasn't changed in the meantime.
Investment bonds
He suggests switching the bond's funds into Standard Life's distribution fund, and because it's the same provider, they would not be charged. "The distribution funds have been a success story for investors looking for a rising income and capital growth without unnecessary or high risk,' says Heath. 'Any income that is not required is redirected back into the bond to enhance its growth."
As well as typically producing a steady income of 4.5%-5%, the bonds are tax-free to basic rate taxpayers such as Margaret.
Because the Winfields have a few years until their early retirement, Heath recommends that they don't take an income from these funds just yet."'Once they retire, then the income option could be switched on, or alternatively a full or partial surrender can be arranged," he advises.
Heath also thinks that Damian and Margaret should continue to make use of their tax-free ISA allowance. Margaret's cash ISA initially offered 6.3% interest in July this year, but that has since dropped by 0.25%. "The outlook for deposit accounts, including cash ISAs, isn't very good. This is due to the recession we're in now and the recent decision by the Bank of England to slash interest rates to stimulate the economy," Heath explains.
Instead, he believes the couple should consider transferring their balances into a better performing cash ISA or stocks and shares ISAs. "I would suggest that they move their ISAs to a decent fixed-rate cash ISA, if they can find one, or transfer them through a fund supermarket, which allows access to all the good fund management groups. I would normally recommend equity income funds or bonds, or a combination of the two," he says.
Damian and Margaret want to pay £250 a month into an ISA and, based on Heath's advice, will probably start paying into a corporate bond ISA. "It's lower risk than pure equities but still promises greater growth than a cash ISA," says Heath.
The couple must also remember to watch out for transfer charges, and should keep a reasonable amount of money easily available for emergencies - a cash ISA would be ideal.
Life insurance
"I would recommend Damian and Margaret surrender their Standard Life lump-sum life insurance as it hasn't performed well," Heath says. "Instead, they should use a high-performing distribution fund with another provider in order to diversify their holdings."
New inheritance tax rules allow an individual's allowance to pass to their partner, so he is not worried about the Winfields getting bitten by IHT just yet. Damian and Margaret say they would be willing to downsize the family home, but Heath doesn't feel this is something they need to think about at the moment. However, he does advise them to have wills drawn up.
"It's been a long time since we've looked at our investments, and some of the advice Mr Heath came up with we hadn't even thought about," says Damain. "From now on, we'll do a yearly review."
Report edited by Nathalie Bonney.
Greg Heath is managing director of Derbyshire Booth Financial Management, in Preston, Lancashire.
Damian and Margaret's to-do list
Move investment bonds into Standard Life'sdistribution funds
Consider surrendering life insurance policy
Get a will drawn up
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