The final steps towards a happy retirement

The first principle of providing independent financial advice is to establish the objectives of a client before recommending suitable investments. It is no good choosing an investment portfolio for growth if the client requires income.

Two couples came to see me recently: both were retired. The first couple were the parents of my wholesale broker, Norman, who deals with my general business, ie house insurance. Norman's father is a member of Lloyd's of London, suffers from serious ill-health and lives in a nursing home. His mother has a shortfall of income because she has to pay the nursing home fees.

His parents have a portfolio between them of approximately pounds 400,000, which is currently providing an income of pounds 20,000. The stockbrokers who were looking after the portfolio had not thought about the client's objectives. They were providing income out of the portfolio through a mixture of gilts and equities, which were taxed, and investing a portfolio of tax- free Personal Equity Plans (PEPs) for growth.

Similarly, the Lloyd's funds (the investments lodged with Lloyd's as security for possible losses) were orientated towards producing capital growth rather than income and hence were not making proper use of the ability to carry forward losses.

I proposed that the PEP portfolio should be switched to provide the highest possible income, producing an annual return of 10 per cent paid quarterly. I suggested that the portfolio of gilts be switched to a lifetime income bond bought from an insurance company, which increased the net yield by approximately 30 per cent.

The risks attached to the lifetime income bond, which is based solely on War Loan, are the same as the gilt portfolio - they are rated AAA, but are slightly more volatile. With an increase in yield of 30 per cent net, the increased volatility is entirely justifiable.

It is obviously more sensible to select investments for PEPs to provide income rather than capital gains, because most people will pay no capital gains tax anyway, but will almost always be liable to pay income tax, either at basic rate of 25 per cent (24 per cent next tax year) or 40 per cent.

Again because Norman's father was a member of Lloyd's with some carry- forward losses it was better to switch his highest-yielding shares into his funds at Lloyds in order to make full use of the losses and eliminate any tax liability from this source of income.

These simple changes increased the net income by over pounds 5,000 per annum. There was some discussion as to whether he should remain a member of Lloyd's, writing only on life or motor syndicates, in order to make use of the inheritance-tax exemptions that apply to funds at Lloyds.

However, there is only any point in doing this if both the wills of the parents are correctly written, making use of the nil rate band together with funds at Lloyds, which are regarded as business assets providing they are commensurate with the names' underwriting.

My next clients were Victor and his wife. He had recently retired from a job in the construction industry with a good pension. His investments had been looked after by one of the major clearing banks and they had managed to generate no capital gains whatsoever for the last five years. Victor had had some part-time consultancy, giving him an income of approximately pounds 20,000 a year for the last few years, but this income was about to cease.

Victor and I spent several hours discussing his objectives and we agreed that the investment portfolio should be split into several parts.

The first part was to switch his general PEPs into a high-yield PEP, again yielding 10 per cent, payable quarterly. The funds invested in single company PEPs were re-invested in one of the water companies where the stockbroker felt there was a good prospect of dividend growth.

Rather than opting for the lifetime income bond, Victor chose a bond with a yield of 11 per cent (this yield has subsequently dropped to nearer 10 per cent), with the return of the original capital dependent on a modest level of growth from the UK and US markets. The balance of the middle third was made up of guaranteed stock market bonds for Japan and a number of unit trusts and investment trusts.

The third part of the portfolio was to be an investment in a residential property in the area in which Victor lived, at a cost of around pounds 100,000. Victor is currently looking at the market in his area through normal agents as well as examining the local auction houses.

In addition we used up his unused pension relief by using a small part of his capital for an immediate retirement annuity. Briefly he placed pounds 20,000 into a pension plan. This entitled him to tax relief of pounds 8,000. He immediately cashed the contract, returning him pounds 5,000 tax-free cash. The net investment was pounds 7,000 (pounds 20,000 - pounds 8,000 - pounds 5,000), which purchased a joint life annuity of pounds 1,500 per annum, giving a gross return of approximately 20 per cent.

It goes without saying that use was made of the wife's allowances and basic rate tax band.

I was pleased to be able to achieve both couples' objectives by increasing their income to meet their expenditure.