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Balancing act

Mr and Mrs Davis are aged 66 and 67 and have been retired for about five years. They asked for an overview of their investments and retirement planning portfolio. How did I think they should proceed?

I explained to my clients that I felt the balance of their portfolio was not correct and that we needed to meet further to discuss other options.

They had various investments two years ago which were set up to provide income through withdrawals and dividend payouts. They also had about £140,000 managed by a Luxemburg bank, having originally invested £100,000. In fact, that sum has now fallen to around £95,000 and, having looked at the structure of it, I could see it was certainly not medium risk, having £12,000 in technology. There were no regular reviews, with guidance on what was happening with the portfolio, other than a bottom-line statement from their old adviser.

It was my suggestion that, to preserve things, they needed to go liquid as soon as possible. That decision has been proven right in light of the volatility of the last few weeks.

I was advised by my clients on the levels of income that they were taking from their investment portfolio. These figures seemed way in access of normal yields or 5 per cent deferred withdrawals within an investment bond. The plans were, in fact, set up as follows:

The couple were taking 14 per cent income withdrawals from a Scottish Mutual investment bond and 10 per cent withdrawals from a Commercial Union investment bond.

They were also taking 5 per cent of the existing value of an Axa Sun Life bond although it was originally established in 1993. To avoid pushing them into paying any income tax, I suggested it could make sense to rewrite the bond, benefiting from restarting on the 5 per cent rule. Also, in light of my clients&#39 current concerns with markets, it was perhaps thinking about lowering the risk profile still further.

One of the worst investments they have held in total performance terms has been the Norwich Union high income plus fund. The Pep was transferred two years ago at a value of £39,500 but this has now lost £5,000 although, of course, the gross yield is still high. I have suggested that this be moved to something like the NDF extra income & growth plan 11. This will at least provide them with three years&#39 peace of mind on a high level of income up to 10 per cent each, with the risks based around tracking the Dow Jones EuroStoxx 50 index with a margin of 20 per cent for falls. Quite frankly, I believe that this product must represent a good opportunity with shares at current levels.

I told the couple that the Scottish Mutual bond must be moved as taking income of 14 per cent is certainly going to deplete the funds quite dramatically and I recommended an Invesco lifetime income plan, which at least can give them their income and have some opportunity of sustaining capital over the longer term. This places 90 per cent into unit trusts and 10 per cent into a building society fund and pays off the income on a monthly basis, also providing for Isa wrappers.

My clients have had their fingers severely burnt and I have discussed the Standard Life with-profits bond as an alternative home for their Axa Sun Life funds.

With regard to the Luxemburg funds, I have suggested the Clerical Medical International global investor bond as this can provide a with-profits wrapper, giving them stability, 5 per cent tax-deferred withdrawals and trust wrappers for inheritance tax planning, which is another issue that my clients have discussed. They have a property in Gloucestershire worth some £400,000 plus. Their wills have not been written to utilise their nil-rate bands so this is another area that we will be looking at.

My clients also have a small mortgage with Alliance & Leicester which is on an interest-only basis and must clear in two years time. It is only £18,000 but it is giving them a lot of concern. They also pay £100 a month on credit cards which is really not a diminishing balance. I have suggested remortgaging up to £35,000, which clears their existing mortgage, clears their credit cards and gives them £10,000 extra cash reserves. I have also suggested encashing the Commercial Union bond.

The overall effect will be to save around £137 on their existing outlay on mortgage and credit cards. The net effect is that their income rises from £585.84 to £972.42 through a combination of reshuffling existing products, drawing income from a previously stale offshore portfolio and reorganising their finances.

They have two daughters who ultimately they would want to have the proceeds of their estate but what is important for this couple at this moment is that they can balance their finances and enjoy life. This structure will give them the rainy day funds they require and the income which will improve their lives, all in a medium-risk portfolio conducive with their circumstances.


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