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As and means

Mr and Mrs A have recently sold their business and are retiring at age 65 and 63 respectively. They have a total of £180,000 in cash and do not wish to take much risk. Mr A has two paid-up personal pensions with Lincoln and Scottish Widows, both offering guaranteed annuity rates although the Scottish Widows plan is only guaranteed at age 75 and on a single-life basis only. His state pension is £10,118 a year. Mrs A has no pensions other than £2,425 a year from the state.

Their aim is to invest for income and capital growth within a low-risk portfolio although they are prepared to take a higher risk with a small proportion. They want to leave £60,000 in cash for the first few years of retirement.

The main problem is that the current low interest rate, low inflation climate means that future investment growth is likely to be lower than in previous years and achieving both income and growth within low-risk investments may prove testing. How should they go about this?

The plan is for Mr A to draw a pension from Lincoln with a 100 per cent widow&#39s benefit (the only option with guarantees) but transfer the Scottish Widows pension to Prudential, which is currently offering the highest annuity for his age, with a 50 per cent spouse&#39s pension. The guaranteed rate will be lost but he will have income over the next 10 years which will more than offset this.

The incomes total £5,734 after taking tax-free cash of £5,616 from the Scottish Widows fund. No tax-free cash is to be drawn from the Lincoln fund due to the high guaranteed annuity rate. A spouse&#39s pension is essential as Mrs A has little provision in her own name.

The £5,616 tax-free cash is invested into an immediate vesting annuity with Standard Life for Mrs A, using both last and this year&#39s stakeholder allowance. This gains tax relief of £1,584 and the resulting fund buys an annuity of £481 a year – a return of 8.5 per cent on the original investment and guaranteed for life. This effectively diverts pension income from Mr A to Mrs A and further uses her tax allowance.

The next issue to consider is income tax and the fact that Mrs A is a non-taxpayer. She will be 65 in December 2003 and will therefore gain the additional age-related allowance from the next tax year onwards. I suggest that she hold £40,000 cash in a telephone banking account paying 3.85 per cent a year with virtually instant access. The balance of £20,000 will be held in joint names at their building society for easy joint access.

A further £26,000 should be invested into a corporate bond unit trust with Norwich Union. This fund has Cat-standard level charges, that is, no initial and a low annual fee.

The yield is around 5.8 per cent a year gross or 4.64 per cent a year net but a large amount of the tax can be reclaimed as Mrs A is a non-taxpayer. In future tax years, 100 per cent will be reclaimable as she will have the age-related tax allowance.

The sum of £14,000 should be invested in two Isas using the GE Life Extra Income and Growth Plan 7. This is a medium-risk plan paying 0.78 per cent a month or 9.36 per cent a year over three years, with the capital return linked to the performance of the Eurostoxx 50 index with a 20 per cent safety measure.

I suggest that the balance of £80,000 is invested in three with-profits bonds with Norwich Union, AMP NPI and Prudential. Income will be drawn after three months at a rate of 4 per cent a year, which is the current bonus rate for these providers, except Norwich Union, which is 4.25 per cent. This places no reliance on terminal bonus rates to pay income, which would be the case if 5 per cent a year were to be withdrawn, and provides greater scope for capital growth and a higher level of future income. This is a relatively cautious approach but these clients are low risk for the majority of their capital.

The total pension income from all sources is £15,852 for Mr A, which is below the age allowance threshold, and £2,906 for Mrs A. She will have a further £1,500 from the unit trusts after reclaiming tax, as well as £1,540 interest from the deposit account. This brings her total income to £5,946 a year, which is slightly under the age-related allowance. She will be liable to some tax for the current year only as she will not reach 65 until next tax year.

Investment income will be £4,510 a year and this can be increased in future. They will be using all their tax allowances to the full, obtaining a higher income than leaving the cash on deposit and benefiting from capital growth on their portfolio.


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