Financial makeover: Reduce risk with a broader portfolio

Name: Neil Lamont

Age: 45

Occupation: production manager

The problem: Mr Lamont has a range of separate investments and pension funds that have been acquired in a somewhat haphazard manner over the years, partly through privatisations and de-mutualisations. He is looking for his financial affairs to be simplified and improved if possible. He would also like advice regarding a pension for his wife, a self-employed but non-taxpaying childminder.

The solution: Subject to capital gains tax (CGT) considerations it may make sense to liquidate some of these holdings which, being mostly in the utilities sector, are less diversified than they should be.

Neil Lamont has a preserved pension with a large multi-national company, which he left following a management buyout. He presently contributes about 15 per cent of his income into his new employer's money purchase scheme, where the money is invested to produce a lump sum at retirement, out of which to buy an annuity. The employer separately pays 3 per cent of salary into the pension fund. Mr Lamont's wife has no pension and pays no tax.

The couple also have a range of investments, including PEPs, Tessas, National Savings, shares from privatisations, plus a C&G instant access account, and an endowment policy from Scottish Life, left over after the mortgage was paid off. The couple calculate the total maturity value of the investments at about pounds 30,000.

In addition, Mr Lamont's father has set up a trust fund for his grandson's education, consisting of several hundred Halifax shares. Two daughters are already at university.

Finally, Mr Lamont has death-in-service benefits worth three times his salary, plus insurance to pay out 75 per cent of his salary for five years should long-term illness strike. In the event of either his or his wife's death, the couple will also receive pounds 10,000 a year through a separate insurance policy with Scottish Life.

The adviser: Andy Cowan, senior consultant at Aitchison & Colegrave Group, independent financial advisers, 10 Park Circus, Glasgow, G3 6AX, (0141 332 5961).

The advice: Retirement ought to be a time to celebrate and Mr Lamont needs to ensure that his pension will provide an adequate income when he does retire. As a member of a contracted-in money purchase arrangement (where he is still paying contributions into Serps, the state's earnings- related pension) Mr Lamont needs to bear in mind that the pension payable is dependent on contributions paid, plus investment performance and annuity rates. He should carry out an extensive audit of how much he is likely to receive at retirement, based on current and continuing contributions.

This would allow for comparisons between different fund performance, whether it makes sense to switch, such as, for example, his former employer's funds into the current one.

Additionally, as Mr Lamont's new scheme is contracted into Serps, it may be worth considering the benefits of opting out through a personal pension. His new employers may not, however, wish to contribute to a personal pension scheme.

As for savings and investments, the couple's portfolio is not particularly viable, given its relatively small size. If invested solely in privatisations it is likely to be concentrated in the utilities sector, while a more diversified fund would reduce overall risk. Some of these investments could be liquidated in favour of more broadly based collective schemes. It should be possible to top up existing Tessa and PEP holdings to the annual limits.

With regard to his death-in-service protection, most people would consider that the amount of "safe" income available from a fund is about 5 per cent of its value. It may therefore be sensible for Mr Lamont to consider topping it up to four times his annual salary, possibly through a private scheme, given its importance to his wife in the event of his death.

As for Mr Lamont's son, our feeling is that the holding in Halifax shares is overly concentrated and likely to underperform the market on a medium- term view. A portfolio of relatively low-risk, zero-dividend preference shares would appear to be a suitable alternative and could be structured to provide regular redemptions to fund school fees over a period.

Mr Lamont wanted some pension advice relative to his daughter who is about to graduate with a pharmacy degree. However, it is presently difficult to offer much advice given that - while good - her present employment prospects are not known. As for savings, again, there are a number of potential options, but until we know her level of income, specific guidance is more difficult.

Finally, Mrs Lamont, who is not able to contribute to a personal pension because of her non-taxpaying status, may still make contributions into a PEP for the remainder of the present tax year and into the Government's new tax-free vehicle, the Individual Savings Account, from April 1999. Should she find herself in a position where her income grow s and she does pay tax, she can, of course, begin paying into a personal pension.

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