Linda and Peter Tinkler, both 52, are dreaming of an early retirement. They
have substantial savings, good final-salary pension schemes and no children
or grandchildren to worry about. But will they be able to leave their jobs
and retire to Norfolk in less than eight years?
Peter, an electrical engineer, earns £20,600 and Linda, an administrator,
earns £15,500. They have paid off the mortgage on their three-bedroom
detached house in Peterborough, Cambridgeshire, valued at £175,000.
The Tinklers have spread their savings in bonds, most of which mature in 2010.
They have £60,000 with Prudential, £10,000 with Legal &
General, £7,500 with Norwich Union and £8,000 and with Standard Life. They
also have £12,000 in an over-50s easy-access savings account with Norwich &
Peterborough, and £6,000 with National Savings & Investments.
Peter and Linda also hold £67,000 in Isas and Toisas, where the interest is
accumulating tax-free. Peter holds 600 shares in Invensys, his former
employer, and Linda holds 600 Standard Life shares, but these are their only
exposure to stocks and shares.
“We have tried to keep our money as risk-free as possible,” says Peter. “We
have always been quite reluctant to get involved with investment funds. We
don't know very much about them and don't want to invest in anything too
risky.”
Peter has a deferred final-salary pension scheme from his former employer,
which he paid into for 19 years. For the past two years he has been in his
current employer's scheme, contributing 7 per cent of his salary, which his
employer matches.
Linda's deferred final-salary pension was also paid into for 19 years. With
her current employer's scheme, she pays 5 per cent of her salary, which her
employer matches. She has also paid into a top-up pension scheme for 16
years.
The Tinklers, who both left school at 15 to work at the white goods company
where they met, would like to enter semi-retirement when they reach 55. Both
intend to leave their jobs to try their hand at something different, but
working part-time rather than full-time. Peter's dream is to set up his own
microbrewery from home, while Linda is considering working in a library.
“We will have been in continuous employment for nearly 40 years when we
retire, so we will be ready for a change,” Peter says. “I would like to set
up a small brewery from home - not to make lots of money, but just enough to
cover costs and make a bit of pocket money.”
Peter estimates that he would need a maximum of £5,000 to set up the business.
When the Tinklers reach about 60 they would like to sell their house in
Peterborough and move to Norfolk, where they have enjoyed their holidays.
Peter would consider moving his brewery there if it proves successful.
The Tinklers have no children, so they are not worried about leaving anyone an
inheritance. “We are not sure whether or not we should aim to rent or buy in
Norfolk,” Peter adds. “We can't really see that there would be much point in
buying a property if we do not have anyone to leave the house to.”
The Tinklers: what the experts say
SAVINGS
Philippa Gee, Torquil Clark
“On the whole, Linda and Peter have organised their investments well, but they
must now organise their savings to fund a long-term plan.
“It is super to see such good use made of Isas and Toisas, and these
tax-efficient structures should be maintained at all costs. However, I am
concerned that their bonds are actually longer-term holdings and are really
investment bonds, which carry no fixed maturity date.
“The first issue, therefore, is to find out what will mature and when. If a
number of the plans are investment bonds, then Linda and Peter need to
consider how worthwhile these are, as they tend to be more beneficial to
higher-rate taxpayers. The downside is that there may be penalties for
withdrawing the money, so a thorough investigation is required.
“Even after they take out the £5,000 capital to help Peter to establish his
brewing business, there still remains £165,000. An income of £7,000 to
£8,000 gross from this is not unrealistic. However, if they were comfortable
with the idea of reducing the capital over time, then they could take a
higher income. While it is possible to run down the capital, with a view to
eventually having little left, it is important to maintain some balance.
They may have no beneficiaries to pass their money to, but they do need to
preserve a certain amount in case of future costs.
“The Tinklers are still young and need to take a long-term view. I would
suggest that the money that comes out of bonds goes into mutual funds and a
better spread of holdings is achieved. The following might be considered: 20
per cent in Jupiter Merlin Income, 10 per cent in Artemis Global Growth, 15
per cent in Henderson Strategic Bond, 15 per cent in F&C UK Growth &
Income, 20 per cent in JPM Cautious Total Return and 20 per cent in T.
Bailey Cautious Managed.”
Action plan
Maintain all tax-free cash savings.
When bonds mature, use money to invest in a mix of mutual funds.
PENSIONS
Laith Khalaf, Hargreaves Lansdown
“Peter and Linda should definitely continue to pay into their workplace
pensions. The money they put in is amplified by contributions from their
employer and the taxman. They are both fortunate to have been members of
final-salary pension schemes, even though they are now no longer with the
employer that provided these. But they should check the terms of these
pensions for early retirement. It is likely that they will face a
substantial reduction to the income they receive if they start drawing it
from age 55, if their schemes will permit them to take benefits so early.
“They can expect a further boost from the state pension when they reach 65,
and can obtain a state pension forecast from the Department for Work and
Pensions. Once they have this information, they may want to make a one-off
pension contribution using some of their existing savings, provided that
they are willing to put this cash away for some extra retirement income.
“This will get some extra tax relief working for them. A £10,000 investment in
a pension has £2,820 tax relief added to it, though this will fall to £2,500
from April. The longer they can leave this untouched, the longer it has to
grow, but a minimum of five to ten years is needed.”
Action plan
Check terms of final-salary pension scheme.
Consider investing a lump sum into a pension to grow tax-free.
PROPERTY
David Hollingworth, London & Country Mortgages
“The Tinklers' decision on whether to buy or rent largely comes down to a
question of choice and much will depend on their motivation. That they
question whether it is worth buying if there is no one to leave the property
to indicates that, to a degree, they would view the purchase of a property
as an investment. On that basis, they may prefer to take their cash out of
property. Some people choose to rent because it gives more flexibility if
circumstances change.
“However, most people will buy a property not just for the potential of
capital growth but first and foremost as a home. It could be that they find
their dream home when they make the move to Norfolk, which will shape their
decision. Owning your home also gives the freedom to decorate and alter the
property to suit your requirements, unlike renting.
“Other considerations are whether the equity in their property might need to
be released to supplement their retirement income. But against this is the
monthly cost of renting and the serious dent that it would make in their
income.”
Action plan
Establish whether or not the equity in their house is needed to fund
retirement.
Linda's response
“The Norwich Union and Standard Life bonds mature in 2010 and we will
consider transferring the money into mutual funds, as suggested.
“Because our deferred pensions will now increase at a rate of only 3 per cent
a year, we may consider taking a 25 per cent lump sum at age 55 and
investing this elsewhere to achieve better growth. Although this will mean a
reduced pension, hopefully the growth from the lump sum will make up the
shortfall in the longer term.
“When it is time to make a decision on where we are going to live, we will
weigh up the pros and cons of buying or renting a property, as outlined by
Mr Hollingworth. On the whole, however, our aims are still the same and,
based on the opinions of the experts, we are pleased to see that they are
achievable.”
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