Financial Makeover: Time for the real world

PATRICK AND Claire have a problem: they have been students for longer than usual. They would like to "make amends" for the fact that they have not made enough contributions into their pensions and are wondering how to plan for retirement. The couple have a number of options. One of them is to buy additional years in their respective pension schemes, although this could prove expensive. A better solution might be to increase contributions into their schemes to the maximum they are entitled to, via employer-backed top-up schemes. Their savings could also do with a "tidy up".

Patrick and Claire spent much of their twenties studing for PhDs. As a result, although they are both now working - Patrick for the last five years, Claire for three and a half - the couple are several years behind in their retirement planning.

Both are members of their respective occupational pension schemes. Their final benefits will be determined by their length of service and their salaries at the time they retire, as opposed to money purchase or personal pension plans, where the final benefits are dependent on the value of the investment fund at retirement.

They have in excess of pounds 51,000 in a variety of investment vehicles - pounds 26,000 being on deposit, with the balance in unit trusts, PEPs and shares. Their present house in Bristol is valued at around pounds 75,000 and they have a pounds 33,000 repayment mortgage with the Abbey National, on a two-year fixed rate at 7.25 per cent, with one year left to run.

Patrick earns pounds 18,500 and expects his income to rise significantly ahead of inflation over the next few years. Claire earns pounds 17,500 and her pay will be linked to promotion, seniority and future, most probably meagre, local government pay awards. They save in the region of pounds 200-pounds 300 per month.

The adviser: Martin McMahon, director of Maddison Monetary Management, independent financial advisers with offices in Surrey, Bath and Nottingham (0800 0742233).

The advice: There are a number of ways additional pension benefits can be improved for both Patrick and Claire.

First, they should examine buying added years in their schemes. This can be done by making a lump-sum payment or an increased monthly contribution to the scheme. But it tends to be expensive: in Patrick's case, it would cost approximately pounds 11,000 for him to buy five years.

Second, the couple could make Additional Voluntary Contributions into their schemes. All occupational schemes have this facility, whereby a member can contribute up to 15 per cent of their pensionable earnings, minus the contribution paid into the main scheme, into an additional fund which will supplement the main scheme's benefits.

Third, they could contribute to free-standing additional voluntary contributions (FSAVCs), available from insurance companies. There is plenty of choice in the market place: notable for good fund performance and reasonable charges are Scottish Equitable, Equitable Life and Commercial Union.

However, the charges levied on in-house AVCs are generally lower than FSAVCs, though the choice of investment funds can be more limited. Another plus point for FSAVCs is the greater flexibility attaching to the choice of retirement date: if you are planning to retire early the contract can be written to your intended retirement date. With AVCs the retirement date is the same as the main scheme.

In their specific case, Patrick and Claire should consider making single contributions for the current tax year into their scheme AVC's. Equitable Life and Scottish Widows supply these, with a good choice of investment funds and consistent fund performance. They could certainly afford to do the same next year and keep the position under review as resources permit.

Looking at their savings, Patrick and Claire have managed to save a considerable sum of money, but their investments are lacking in strategy.

They have a broad spread of unit trust investments, including a GT Global US Growth Fund currently valued at around pounds 10,000; Investco UK Growth Fund, current value pounds 3,500 and an NPI Capital Investment Bond worth pounds 4,000. They have placed their Woolwich shares into a PEP and also have a selection of other blue chip privatisation issues. Overall the equity portfolio looks well balanced.

Their deposit-based saving could do with a little tidying: they both have pounds 3,000 in their cheque book current accounts paying just 0.5 per cent interest. In addition they have pounds 2,700 in various small deposit accounts. This sum could be used to fund their AVC contributions, as it is not makig significant returns here.

They also have a Portman Building Society One Year Bond at 7.5 per cent gross, with pounds 6,000 invested; a Bristol & West Six Month Bond at 7.45 per cent; together with a Birmingham Midshires Tessa and National Savings 7th Index Linked Certificates. Having pounds 26,000 on deposit probably means that their money is not working as hard as it might.

In fact, Patrick is happy to maintain pounds 7,000/pounds 8,000 in cash and to take a five to 10-year view of returns on equities. With this in mind, I suggest that over the next six months as the various fixed term bonds mature they move towards asset based investments to include using their PEP allowance for this tax year, before it disappears.

If they are nervous about the short-term outlook for equities they might consider the M&G Corporate Bond PEP, which carries no bid/offer spread but has exit charges in the first five years. Saving pounds 200-pounds 300 per month means checking regularly that they are obtaining the best available interest rate.

At present Patrick and Claire feel that they do not need to insure their lives or their incomes. With secure jobs that provide a package including death in service benefits worth two times salary, plus a pension for the survivor, combined with full salary for six months and 50 per cent for the following six months in the event of sickness or disability, they could well be right.

However, I would recommend that they take up "decreasing term assurance" to cover their repayment mortgage. With pounds 33,000 of the mortgage currently outstanding the bulk of the death in service benefit would be used up. A reputable company such as Norwich Union would provide this type of cover for around pounds 6.50 per month and for an additional pounds 8.56 per month would extend the cover to pay out on the diagnosis of a critical illness such as cancer, heart attack, stroke.

Finally, they should make their wills, not least because it ensures that what they want to happen to their estate happens, but also, as they have individual savings and bank accounts it would ease probate and generally smooth the passage of events during a difficult time.