The recent death of his wife has forced Richard Atwood, 47, to review all his
financial arrangements, but it is a daunting task and he doesn't know where
to start. “The initial shock is beginning to wear off,” he says, “but I feel
slightly panicked when I think about our finances.”
Richard's late wife, Caron, had bowel cancer diagnosed in December 2006, but
it spread quickly, despite a course of chemotherapy, and she died in
February, aged 42.
The couple had three children, Rachel, 15, Naomi, 12, and Steven, 7. Naomi has
speech, language and learning difficulties and stays in a residential school
during the week. The family lives in a six-bedroom home in
Marske-by-the-Sea, close to the Yorkshire Moors. “It is the sudden
realisation that the future direction of my children's lives rests on
decisions that I will have to make now. I feel incredibly unprepared, naive
and vulnerable. No one can ever prepare you for it,” Richard says.
Despite his understandable concerns, Richard's finances are not in bad shape.
He took home almost £56,000 in salary and dividends from his photographic
business last year, which he runs with a partner.
He has a £62,000 mortgage, at 6.55 per cent in a Virgin One account,
which he will pay off in 13 years. He can, however, borrow more on the
account, and is thinking about “taking a gamble” and adding an extra £7,200
to the total to make a high-risk investment in the stock market. With the
returns he would hope to pay off his mortgage early, or add to his pension,
but he would like more advice before taking the plunge.
Richard has £4,000 in a maxi-Isa, invested in Invesco Perpetual's Latin
American fund. Caron had £9,000 in a personal equity plan (Pep), which
Richard has been advised will have to be converted into a unit trust for tax
reasons. He wants this money ring-fenced for Rachel's university education
and says: “It was an agreement throughout our married life and it was
Caron's dying wish that the money be used for this purpose.”
With the loss of his wife's £13,000 salary, Richard is concerned about how he
will maintain the family's life-style. “I owe it to my children to continue
the luxuries they have had, such as toys and sports clubs, but I am worried
about how my finances will look in the future,” he says.
Richard has already cut back on gym and golf club membership and his football
club season tickets.
He started a pension with Prudential 12 years ago and pays in £137 a month. He
also has a small Virgin stakeholder pension, worth about £6,100, but he
isn't paying into it at the moment.
In the back of his mind he knows that selling the £400,000 home and downsizing
nearer retirement will provide a lump sum that he can invest in an annuity,
but he isn't sure that this is the best course of action.
His wife had a Clerical Medical pension worth £20,000, of which £6,000 will be
paid as a lump sum to Richard in the next few months. He is thinking about
investing this, as an alternative to increasing his mortgage borrowing. The
rest will be paid as an annuity. Richard would like this to be paid into an
account for the children, so “her money will go directly to her children”. =
Richard Atwood: what the experts say
FINANCIAL PLANNING
Andrew Collett, Evolve Financial Planning
“Pep wrappers do fall away on death, but rather than sell his late wife's Pep,
Richard could ask Jupiter to convert up to £7,200 of it into a Jupiter
Income Stocks & Shares Isa in the new tax year from April 6. However, if
he would rather fund his Isas using cash from elsewhere, he could leave the
holding as a unit trust, notionally earmarked for Rachel's university fees.
He will need to declare any dividends on it each year, but they are paid
with basic-rate tax already deducted. It is likely that any gains will be
well within his annual capital gains tax exemption.
“Alternatively, Rachel could open her own cash Isa when she reaches 16.
Richard could transfer money from the Jupiter holding into this Isa each tax
year. It is possible that by the time she reaches university age, the entire
holding could have been converted to cash Isas.
“I recommend that Richard tries to save any surplus income either in pensions
or an Isa. By saving into a stocks and shares Isa on a monthly basis he will
benefit from ‘pound cost averaging', which helps to smooth the peaks and
troughs in the stock market. It will also reduce greatly the risk of putting
in a lump sum and trying to time the market, which is almost impossible.”
Action plan
Leave £9,000 as a unit trust and earmark for Rachel, or transfer slowly into a
cash Isa in her name.
Contribute either to a pension or a stocks and shares Isa account.
PENSION & INVESTMENT
Martin Stirling,
Grant Thorton
“Richard may be tempted to gamble with his property equity, but I strongly
advise against this. Rather than looking at how much he could make, I would
counsel Richard into thinking about how much he could lose and the effect of
this on his family.
“Richard should also review his £4,000 holding in the Invesco Perpetual Latin
American fund, which is high risk. I would prefer a more diverse approach,
rather than holding a large amount of his portfolio in a single fund.
“Richard should also look at the Virgin stakeholder pension fund, even though
he is not paying into it, and consider switching into the Virgin FTSE
All-share Tracker Fund. He should also consider adding to this pension any
additional long-term savings he feels that he can make. If he did this,
though, he would need to review the position with his accountant, taking
into consideration that most of his income currently comes to him as
dividends.
“He may wish to consider taking more taxable income so that he can receive
full tax relief on additional contributions to pensions over and above the
£3,600 gross per annum that anybody can contribute.”
Action plan
Do not borrow to invest.
Diversify high-risk Isa fund.
Move Virgin stakeholder pension fund to the FTSE tracker.
Look at making a one-off contribution to his pension.
PENSION
Tom McPhail,
Hargreaves Lansdown
“Based on Richard's existing pension funds of £32,000, and contributions of
£136.77 a month, he could expect a pension pot at age 60 of about £105,000,
which would produce an income of about £3,000 a year.
“Richard should be entitled to a basic state pension and a state second
pension, but the former is only £4,716 for the 2008-09 tax year and his
state second pension will probably be quite modest. I suggest that he asks
for a forecast from the Pension Service on 0845 6060265.
“With regard to downsizing, at the age of 60 every £100,000 that Richard
releases from his property will produce about £4,000 a year of
inflation-linked income. At age 65 the figure would be about £4,750.
“As Richard takes most of his income as a dividend, he will not be able to
contribute a large amount to his pension. However, he could look at making a
one-off contribution from his company. A £10,000 payment now would buy him
an income of about £600 a year at age 60.”
Action plan
Get a state pension forecast.
Make a one-off pension contribution.
MORTGAGE & INVESTMENT
Jonathan Cornell,
Hamptons International
“His current account mortgage is an effective and tax-efficient way of paying
off his mortgage early, as any savings will reduce the mortgage debt. With
mortgage rates being repriced upwards so fast at the moment, his rate of
6.55 per cent is not uncompetitive.
“My recommendation is not to borrow on the mortgage to invest with a view to
paying it off quicker, but to pay off as much as possible.”
Action plan
Stick with mortgage deal, which is competitive in the current market.
Focus on clearing mortgage debt.
Richard's response
“The experts' view that gambling with the house equity is foolish
provides a firm foundation on which to move forward. The downsizing figures
for the house will be an integral part of my long-term plans - what's the
point of having a large house once the children leave home?
“It is good to know that the mortgage is competitive and I will take advantage
of the flexibility to pay off chunks of the loan.
“I accept that the Jupiter Isa needs to be invested into more diverse funds
and will ring-fence it for Rachel's university costs. I like the idea of
Rachel having her own Isa for university and to teach her about saving.
“I will increase pension contributions from additional taxable income and
switch the Virgin pension to the FTSE tracker. All my life cover has been
put into trust for the children and legal guardians have been appointed.”
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