Financial Makeover: A wealth of options

NAME: WINIFRED RAE AGE: 68 OCCUPATION: RETIRED SCHOOLTEACHER

Winifred, who was widowed more than four years ago, lives in a village near Diss, Norfolk, and is a retired schoolteacher. She has five children.

Her teacher's pension plus other small pensions total pounds 12,500 gross a year, and she gets a state pension. With no mortgage and few outgoings, she saves a little each month.

Winifred has a share portfolio comprising a dozen stocks, with a market value of over pounds 62,700, and a PEP portfolio worth over pounds 14,000, with various building society and bank accounts including a Tessa worth around pounds 63,000, plus pounds 15,000 invested in a Pensioner Bond Series 2. Winifred has made a will, in which her entire estate is divided equally between her five children.

Her principal objective is to simplify her affairs, make her funds work harder, remove some of the worry out of her investments and adopt a more holistic approach to the management of her financial affairs.

The adviser

David Holland, managing director of RK Harrison Financial Planning, with offices in the City of London, Bedford, Salisbury, Exeter, Banbury and Scotland (01234 305555).

The advice

Dealing first with the share portfolio, this is pregnant with capital gains tax (CGT), and she has not yet used up her 1998/99 CGT allowance of pounds 6,800. Nearly 36 per cent of the portfolio is represented by BP shares and, whilst they have been a very good performing stock, oil prices are very volatile and, with the current price near to the 12-month peak, now would be a good time to reduce the holding in order to crystallise a gain against her annual allowance.

We would recommend that she consider disposing of about 650 BP shares, which should crystallise a gain, according to our calculation, of pounds 2,795. Her shares in Woolwich and Alliance & Leicester, which are businesses- centred around mortgages, which will become increasingly competitive and potentially less rewarding, should also be sold. As these come from demutualisation, the total value of these shares plus the realised gain from the BP shares should use up most of the pounds 6,800 annual CGT allowance.

She is underweight in financials within her portfolio, and if she wished to buy alternative stock with the sale proceeds, we would recommend NatWest Bank. They have produced good figures, and the shares have a good yield.

The Inheritance Tax nil rate threshold increases from 6 April 1999 to pounds 231,000. Estates valued in excess of this figure attract 40 per cent tax on death, which would give a potential tax liability of over pounds 31,000. This could be reduced by making lifetime gifts or using the annual gift per donor of pounds 3,000.

She has expressed the desire not to be a burden on her children in later life, should she become unable to care for herself. There are a number of long-term care products on the market which are similar to traditional insurance policies, in that they only pay out if you make a claim. Some see this as an expensive way to pay for potential long-term care needs which may not be required. It means that, if you remain healthy, you have paid out money and you will get nothing in return.

Scottish Amicable European has a different approach. Theirs is an investment bond with long-term care built in. If you do not need long-term care, the value of the bond can be held under trust, which could be written for the benefit of Winifred's five children. Under such a policy, for a single lump sum investment of pounds 35,000, long-term care cover of pounds 22,920 a year could be provided on the assumption that the cover remains level or, if increasing in line with national average earnings, the initial cover would be pounds 7,200.

The ability of the bond to support the long-term care cover throughout life is conditional upon the fund or funds into which the investment is made achieving the required growth rate. For example, at a growth rate of 8.5 per cent after fund charges, the fund is expected to support cover throughout the life of the insured individual. It is also possible to strip out from the bond an income of about 2.5 per cent of the fund to pay annual premiums of pounds 843.29, which will provide pounds 30,000 whole of life cover.

Winifred has a number of existing PEPs: Morgan Grenfell, in which she invested pounds 4,000 in 1995/96 and which today has a value of only pounds 4,044 - partly the result of disastrous performance by the Asian Trader Trust.

In 1996/97 she invested pounds 4,000 in a Jupiter PEP, split equally between four of their trusts. The best performing, their European fund, now has a value of pounds 1,322.

For 1997/98 Winifred invested pounds 3,000 in Mercury Asset Management European Privatisation fund, which hasn't done so well, with a current value of pounds 2,743.

For this tax year, about pounds 2,600 has been invested in an Invesco PEP in their European Growth fund; although Invesco's European Growth fund is one of the best in its sector, the value of her PEP now is below pounds 2,400, which shows that with any lump sum investment timing is critical. Winifred has over pounds 57,000 in deposit accounts with Alliance & Leicester, Cheltenham & Gloucester and the Chelsea, with pounds 8,400 within a Norwich & Peterborough Tessa.

With current low interest rates, she should consider liberating some of the funds held on deposit: first, to use up her pounds 6,000 PEP allowance for this tax year, by investing pounds 3,400 into the European Growth Trust, Europe representing a reasonable long-term growth investment opportunity.

The Series 2 Pensioner Bond, which ran from September 1994 to November 1995, is giving a 5 per cent gross fixed-rate of return for five years, paid monthly, the income paid gross but subject to tax. This represents good value, but I would not recommend the Series 8 Pensioner Bond, which only offers 4.25 per cent. The Budget announcement implied some improvement to Pensioner Bonds and indicated removal of the five-year investment period.

I suggest a with-profit bond with Legal & General for some of her cash, with some of the balance invested in Prudential's Egg account, which is giving 6 per cent gross on investments of pounds 1 plus. She only needs about pounds 10,000 in deposit accounts.