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Case Study: Health problems force a rethink
By Hannah Ricci
Into the future
Tim suffers from enteric neuropathy, which is a degenerative neuromuscular disorder of the digestive system and is coupled with fibromyalgia. Tim is unable to ever work again, and although he has a number of protection policies, his family's finances have been thrown into disarray and he wants to sort them out to prepare for the future.
Tim started his own catering company, Morton's Fork Ltd, many years ago, and although he is unable to be actively involved, Ann works part time in the company, which currently has a turnover of around £1.5 million a year.
The Mortons have a repayment mortgage of £163,000 with Alliance & Leicester on a fixed rate of 4.4% for five years. They are repaying this at £833.69 a month.
Safe returns
They also have a substantial amount in savings, but would like advice on the best options for their circumstances. "We need savings and investments that are as safe and accessible as possible, while giving the maximum return possible," explains Tim. "We also need to maintain a steady income and prepare for Samuel and Caitlin's future needs."
Bruce Jamieson, of Jamieson Financial Management, first turns to Tim's protection policies, because of their increased importance since his diagnosis.
Critical illness cover
"Tim took out three policies with Scottish Provident, Sun Life of Canada and Scottish Equitable," explains Jamieson. "Each of these included cover to pay out in the event of critical illness and permanent total disability (PTD)." Scottish Provident has paid out £278,000 to Tim, and Sun Life of Canada will shortly be paying out around £60,000. But Tim is unable to claim on his Scottish Equitable plan (worth £28,000) as his condition - which is incredibly rare - was not listed on the plan and his previous IFA failed to tick the box for permanent and total disability (PTD).
PTD is an important added benefit in critical illness plans as it acts as a safety net; rather than paying out for specific conditions, it pays out on those conditions that leave you unable to work for the rest of your life.
Due to the Mortons' outstanding mortgage amount of £163,000 and Tim being unable to take out life insurance due to his ill health, Jamieson advises Ann to take out cover on her own life for a term of 20 years on a level basis. "If we cover just the amount of the mortgage, this will cost £10.84 a month with Legal & General," he explains. "But if we include the same amount of critical illness cover, which in the circumstances might well be worth having, we can arrange this with Norwich Union for around £54.65 a month."
Investment options
Tim and Ann now have around £400,000 in personal financial assets. This is made up of £6,000 each in individual savings accounts with Alliance & Leicester; £25,000 in Alliance & Leicester's Online Saver account; £30,000 in premium bonds; and the payout from Tim's two protection policies, which total around £338,000.
"From this £400,000, Tim and Ann want to use £100,000 for a house extension and £160,000 to pay off their mortgage when the fixed period ends in four-and-a-half years' time," says Jamieson. "They've also lent a sum of £75,000 to Morton's Fork that they reclaim from time to time, which leaves them with approximately £200,000 to invest."
He points out that due to their circumstances and the fact that the Mortons already have a relatively high degree of risk with their company, their personal attitude to risk should be cautious.
The Mortons want quite a large proportion of their money to be easily accessible, so Jamieson recommends they maintain around £56,000 in cash deposits. "They're already making use of the Alliance & Leicester cash ISA for 2005/6, which pays a competitive 5.2% AER, so it makes sense for them to invest a further £3,000 each for the 2006/7 allowance as well. And I'm happy for cash to remain with Alliance & Leicester in the Online Saver simply for ease of use and in case anything unexpected happens. However, I think they should consider two guaranteed income bonds with Cardif Pinnacle."
Guaranteed growth
Jamieson says the Mortons should invest £50,000 with Cardif Pinnacle, which is owned by BNP Paribas (£25,000 over both three and four years), to achieve a guaranteed growth rate of 12.65% and 17.66% respectively, free of tax. "This ensures that should interest rates go down, the rate would be guaranteed and there is no tax liability for standard rate taxpayers. These particular guaranteed bonds do not depend on the performance of indices; it's purely a deposit account with a guaranteed rate of interest and, being such a large company, can be considered safe."
Jamieson recommends that Tim and Ann dip a toe in the water with two different low-risk investments. He says they should utilise their equity ISA allowance of £4,000 each by investing in the Norwich Property fund, from Norwich Union. This invests in the bricks and mortar of commercial property, such as retail units and offices, and is relatively low risk. "They should also consider investing a further £12,000 in this fund, outside the ISA," he adds.
Jamieson also suggests the Mortons look at investing £20,000 in the Old Mutual Corporate Bond fund. "This is a fixed-interest fund, and is probably one of the very best in the market." And as the Mortons don't currently require income from their investments, the interest can be rolled over.
Pension provision
Next, Jamieson recommends index-linked National Savings as ideal for Tim and Ann's current circumstances and suggests they invest the remaining £40,000 over three years.
Finally, he looks at Tim and Ann's pension provision and their company, Morton's Fork Ltd - the shares are split 75:25 between Tim and Ann and their executive chef. The firm is the Mortons' main source of income, and this is expected to be £2,474 for Tim and £1,754 for Ann each month. The company consists of ordinary shares worth around £100,000, and a further 100,000 of 6% preference shares, worth approximately £112,000.
Although they have three pension plans between them, a Norwich Union Stakeholder pension plan each and a Sun Life of Canada pension for Tim, Jamieson points out that pensions aren't a particularly important part of their financial future. "It's the performance of the company that's the key to what happens in the future, because if it fails to perform, it's going to make life a lot more difficult. On the other hand, the Mortons have appointed a new general manager and if it does perform, it could produce substantial sums in the future."
Jamieson concludes that, although paying their mortgage off will diminish their capital, it will provide a much-needed comfort factor for the family. "And, hopefully, there will be more savings and cash coming in by then to boost the figures again," he adds.
Tim says he has been very impressed by Jamieson's advice. "He was working to our agenda, not his - he listened to us and understood our circumstances."
Bruce Jamieson is principal of Jamieson Financial Management in Bognor Regis, West Sussex. Contact: 01243 841 825
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