Healthy future

NAMES: Zoe Sinclair and husband Martin

AGES: 47 and 61

OCCUPATIONS: NHS clinicians

PROBLEM: Zoe earns pounds 26,000 working for a health trust in Wales, while her husband earns pounds 31,000. They have a small mortgage, backed by a Scottish Amicable endowment policy taken out in 1987. The couple have a range of savings and investments, including Tessas and PEPs with Barclays, UK Government stock and a small number of BT shares. Most of their investments are aimed at the longer term.

Martin aims to retire within the next few years, Zoe at 61. They aim to to maintain as far as possible their current lifestyles after retirement and have both payed significant pension top-up contributions into separate Free-Standing Additional Voluntary Contribution schemes (FSAVCs).

THE ADVISER: Philippa Gee, of Gee & Company, a fee-based financial planning practice in Shrewsbury, Shropshire (01743 236982).

THE ADVICE: "Our calculations show that Zoe could receive an income (including benefits from past and present occupational schemes, FSAVC arrangement and state pension entitlement) equal to 61 per cent of her final salary, plus a tax-free cash sum of pounds 41,000, at her chosen retirement date.

An important point is that both her and Martin's occupational pension schemes participate in the public sector "Transfer Club" which can offer good terms for those transferring their entitlements from one job to another.

Our calculations indicate that, if allowed, transferring Zoe's credits from other public sector schemes into the NHS one would be financially beneficial, particularly as benefits in the previous scheme are linked to the salary at the date she stopped working.

By transferring her benefits, they will instead be linked to Zoe's present salary, which has risen faster than inflation.

Zoe has little scope to increase pension contributions as they are already close to the maximum allowable of 15 per cent and as a result the required income would need to be provided via a separate investment.

Ideally this would be in the form of a PEP, which could also be used to shelter from tax shares she is due to receive over the next few months from the Halifax.

Martin plans to retire sooner. We estimate he could receive an income (including benefits from the NHS, Universities Superannuation Scheme (USS), FSAVC and basic state pension) of approximately 71 per cent of final salary, plus a cash sum of around pounds 55,000. While the USS also participates in the Transfer Club, our calculations indicate that in his circumstances it would be better to leave matters as they are.

Not only will Martin and Zoe's joint income in retirement meet the desired level of two-thirds of salary and will be indexed thereafter, but a total cash sum of pounds 96,000 could also be paid.

While Martin will retire some time prior to Zoe, the combination of pension (Martin) and earnings (Zoe) during this period should not give cause for concern. If required, retirement income could be boosted by making payments into a personal pension plan based upon Martin doing a small amount of private work in retirement. A single lump sum can be paid in and the benefits taken immediately if required. This is an excellent method of boosting retirement income while maximising tax advantages available.

Zoe is concerned about her FSAVC policy and whether it was the best option available, in particular when compared to the "in house" top-up scheme with Equitable Life.

Generally the charges under the Equitable Life AVC will be lower than the charges under both FSAVCs as the NHS have negotiated competitive terms. However lower charges will not necessary mean a higher level of pension. This will also depend very much on the investment performance achieved by the insurers. The higher charges on FSAVCs tend to be more apparent in the first two years of the policy especially if contributions cease. The couple have been contributing for over four years. Both Prudential and Scottish Amicable are large, financially strong companies and therefore should be well placed to achieve satisfactory future returns.

On a more general basis, I would make the following observations.

Martin owns another property which will shortly be rented out for pounds 360 per month. The property is currently held in Martin's name only. Given that he suffers higher rate tax and is likely to continue to do so for the time being, it may be appropriate to consider moving the house into Zoe's name, as a basic rate taxpayer.

He has assets of which two-thirds are invested in UK equities, about 8 per cent invested overseas, the majority of which in Europe, and the remainder in fixed interest stocks.

Clearly by using only one investment company his choice of funds has been extremely limited (for example, the Japan fund has been particularly weak compared to that of its peer group). Also, the fixed-interest exposure is quite high for someone happy to take a medium/higher risk approach. Geographically, South-east Asia is not represented and in a long term growth portfolio there ought to be some exposure to those markets.

Zoe and Martin are currently saving pounds 400 each month and the rental income will be in addition to this. I would suggest they build up cash savings for any unforeseen requirements. Their Barclays account pays a low interest rate of 2.3 per cent gross. A more competitive account should be used, for example the C&G, currently offering 6 per cent gross.

Once this has been set up they should look to maximise investments which provide tax free benefits. Therefore Martin should begin a Tessa and both should look to concentrate on building up PEP holdings. Not only will this give further equity exposure and tax free growth, but will be an excellent method of increasing retirement income in the future, free of tax.

The mortgage is held in joint names, yet the endowment policy is in Zoe's name only. To incorporate Martin into the policy at normal rates would cost an extra pounds 28.40 per month. Alternatively, we would suggest that a portion of Martin's tax free-cash sum at retirement is used to repay the mortgage, thus saving total interest costs of more than pounds 15,000. The endowment policy should be retained to boost retirement funds, with current illustrations giving a projected maturity value of pounds 24,600 assuming an annual rate of return of 5 per cent and pounds 33,200 at 10 per cent.

Martin has not yet made a will and this needs to be put in place urgently - if he were to die now, his estate would be dealt with under intestacy law, not as he would wish."

THE VERDICT: "We are extremely pleased with the advice, which seems very clear. Philippa is on the ball and we intend to start implementing things straight away."