Hard work and the discipline to save before they spend have put Colin Pettitt,
a 50-year-old factory worker, and his wife, Vera, a supermarket sales
assistant, in a stable financial position.
The couple, who share their four-bedroom bungalow in Brighton with their two
sons, Robert, 21, and Lee, 18, became mortgage-free two years ago and have
amassed a portfolio of savings and investments worth nearly £200,000. Their
estate was boosted by an inheritance of £122,000 when Vera’s mother died
last year.
Colin and Vera, 43, have joint income of £36,000 a year and their sons also
work full-time. Colin says: “None of us owe anyone anything, but it has
taken us a long time to reach this position and has been a struggle.”
However, achieving security has raised other concerns, such as inheritance
tax. “More than anything, I resent having to pay more tax than is necessary.
We would like to know how we can minimise these bills,” Colin says.
Since 1989 he has invested in Peps and Isas to avoid tax and has accumulated
holdings worth about £33,000. He would like to know how to reduce charges
and whether he should change the funds or consolidate them. The Pettitts
currently invest in the Credit Suisse Income Fund, Clerical Medical Insight,
Marlborough Special Situations and New Star Higher Income. They also have
cash Isas with Nationwide, Alliance & Leicester and Abbey.
The inheritance money is split between a Chelsea Building Society
instant-access account paying 5.5 per cent, in Vera’s name, and a Nationwide
eSaver account, paying 5.05 per cent. Colin would like to know if there is a
better place to house the cash.
The couple have two endowments with Resolution Life. One is due to pay out
£16,625 in November; the other, worth £676, will mature in October. “Should
we keep them for the terminal bonuses or should we surrender them?” Colin
asks.
Another key priority is to help Robert and Lee with a deposit for a home. The
boys pay their parents £50 a week “rent”, which goes into their own savings
accounts for things such as holidays.
When Robert and Lee move out, Colin and Vera plan to downsize, although they
will stay in Brighton. “We love it here,” Colin says. “Brighton is
convenient and a really fun place to live.”
Colin hopes to retire at 60. He has a work pension and a personal with-profits
pension with Standard Life, worth £19,700, but he would like to know how to
maximise his retirement pot. Vera, Robert and Lee each invest monthly in
Standard Life stakeholder pensions. Vera’s pot is worth £9,000, Robert’s
£3,000 and Lee’s £2,000. The family owns shares worth more than £8,000 in
Standard Life after the insurer demutualised.
Colin has life insurance through work worth £140,000. Vera has a Friends
Provident policy, costing £19.87 a month, which will pay out £120,000 on her
death. Both have wills from before the boys turned 18 and want to know if
they need to be updated.
The Pettitts: what the experts say
SAVINGS & INVESTMENT 1 Justin Modray, adviser, Bestinvest
“The Pettitts could earn more interest on the nonIsa money by switching to a
Landsbanki Icesave account, paying 5.7 per cent.
“Their equity Isas are not as healthy as their cash Isas. The couple should
move all their funds into a fund supermarket such as Cofunds or
FundsNetwork. This will give more choice and make switching and monitoring
easier. They must then prune the poor performers. Switching some money to
overseas markets and other asset types, such as bonds, commodities and
property, will give a better spread and provide some protection if the UK
stock market tumbles.
“Midas Balanced Growth is a good one-stop shop, but they could combine their
own range. They should trim back the Marlborough fund to £2,000 and spread
the money from the others across funds such as Rensburg UK Select Growth,
Jupiter Income, Artemis Global Growth, M&G Global Leaders, SWIP Property
Trust and New Star High Yield Bond. They might also consider a small
exposure to more risky, specialist, funds such as JPM Natural Resources and
Aberdeen Asia Pacific. They can purchase these funds outside an Isa, then
offset gains against their annual capital gains tax allowance, currently
£8,800.”
SAVINGS & INVESTMENT 2 Mark Dampier, head of research, Hargreaves
Lansdown
“The Pettitts should consolidate into a fund supermarket to reduce charges.
But before doing so, Colin should sell the Credit Suisse Income fund now
that Bill Mott, the celebrated fund manager, has left.
“Colin should also sell the Clerical Medical Insight fund and the Nationwide
Isa bond. Instead, they could seek more equity income funds, reinvest the
income for the time being and then take the income after they retire.
“With interest rates rising, they should monitor closely the rates on their
Isas. National Savings & Investments is now offering 5.85 per cent and
it may be worth consolidating all their cash Isas into this.
“The cash accounts should be solely in Vera’s name, perhaps in a Birmingham
Midshires direct telephone savings account, paying 5.25 per cent, or
Alliance & Leicester’s Direct Saver, paying 5.64 per cent. They should
aim for £50,000 in cash for flexibility. They could tie up the rest in
index-linked National Savings Certificates. I would probably leave alone the
endowments because they are so close to maturity.
“As for the boys, I was tempted to suggest that Colin should increase their
rent to something more like real market value.”
PENSIONS Patrick Connolly, financial planner, JS&P Towry Law
“Colin should continue with his generous work scheme for as long as possible.
In the meantime, he should examine the funds it is invested in and put in
place an appropriate asset allocation strategy.
“He should also consider ditching his Standard Life with-profits pension. A
self-invested personal pension (Sipp) would be a better option. The sons,
meanwhile, should keep the stakeholders because of the tax relief. Vera,
despite being a nontaxpayer, will also benefit from 22 per cent basic-rate
tax relief on pension contributions.
“Colin could also consider making additional pension contributions out of his
building society accounts.”
TAX Mike Warburton, senior tax partner, Grant Thornton
“If Colin died and left all his assets to Vera, she could face an inheritance
tax (IHT) bill of about £75,000 on her death. This is avoidable by each of
them using their nil-rate band of £285,000.
“Alternatively, they could set up a nil-rate band discretionary trust on their
wills. There would be no need to transfer cash or property into this trust
because the will could give power to the executors to settle the amount due
to the trust by means of a debt. If Colin were to die first, all assets
would transfer to Vera, but it would be subject to an IOU to a trust for the
children, payable on her death. This would be an interest-free debt. On
Vera’s death, there would be no IHT.
“If the Pettitts are worried that increases in asset values would take their
estate above £600,000, Vera could arrange for a deed of variation on the
estate of her mother. Because she died less than two years ago, Vera could
vary the terms of the will retrospectively by this deed so that some of her
mother’s money passes directly to the children without it being treated as a
transfer by Vera for IHT purposes.
“In any event, it would make sense to review the wills now that the boys are
adults.”
Colin’s response “We read the advice given by the advisers with
great interest. They made some very interesting comments.
“We will certainly consolidate our investments with one supermarket provider
to help to keep track of our investments. Their charges are much clearer and
we will also save money. The ability to transfer funds with mininum fuss
makes life easier.
“We will also add to Vera’s stakeholder pension with a lump-sum payment: it’s
a nice thought that the Government will top up the payment through tax
relief. We will look into converting the Standard Life with-profits pension
into a Sipp, again seeking to consolidate with one provider to give us a
wider choice of funds.
“We realise that we have to update our wills now our sons are over 18. This is
an area in which we will seek professional advice.
“Does Mark Dampier have 20-year-old children? To judge by what our sons tell
us, we are lucky to get the money we do: some of their friends seem to think
£10 or £20 a week is more than enough.”
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