A spanner in the works

John and Sheelagh Morgan
Age 54 and 52
Live in Flitwick, Bedfordshire
Occupations Engineer, civil servant
Earn ?32,000, ?8,000
Mortgage ?70,000
Debts None
Investments Unit trusts, Pep, Isa
Pensions Both have company pensions
Aims To survive redundancy

John Morgan thought he had his life planned out. He intended working for two or three more years and then taking a comfortable early retirement before he reached 60. But just before Christmas he was forced to change his plans.

He works for Vauxhall Motors in Luton where, in the middle of December, the company announced it would stop making cars at the Luton plant in 15 months' time. John was to lose his job after more than 39 years there. He started as an office boy, took his engineering apprenticeship and has been in manufacturing engineering since 1975.

He will be employed until the plant closes in March 2002 and has been offered a separation package: 'The financial offer for early retirement is £41,000, of which £30,000 is tax free. My Vauxhall pension would be £1,641 a month before tax at December 2000, or £1,135 a month if I take a maximum lump sum of £54,000.'

John will have to look for another job before stopping work completely. He has been scanning the local papers for something different but interesting, perhaps in a garden centre: He reckons he will need to earn about £12,000 a year: His ideal job would be working with preserved steam railways, but they only want volunteers.

Sheelagh has 28 years' contributions to the Civil Service pension and together they have various investments with Windsor Life: an endowment for £37,000, a Pep, an Isa, an investment plan worth £6,000 and another worth £11,200: 'The last payment is due on 10 May 2006, my sixtieth birthday.' Their cash savings comprise £1,000 in a Woolwich high-interest account.

Whatever work John finds, they want to continue travelling. 'We like our holidays. If we manage three a year, we are happy.'

Adviser 1: Danielle Leich

When facing redundancy, it is important not to touch the lump sum until you have fully thought through your financial future. We advise people in this situation to keep their money in cash deposits for at least a year while they adjust to their changed circumstances. People often underestimate how much they will need for leisure activities when they first retire.

As John is planning to work part-time, he could defer drawing the pension and live off his new lower earnings until he retires properly. If he takes it now, he must decide whether to take a cash lump sum or the full pension. The difference is about ?500 a month so, unless he really needs the capital, or thinks he can earn more than 9 per cent on it, he should take the higher pension.

John and Sheelagh should work out a realistic budget that they can stick to. Then they will know whether they can afford to spend money on fulfilling dreams or need to invest to boost retirement income.

They should not surrender the endowment so close to maturity to redeem the mortgage; instead they could use the lump sums they have. When the endowment matures in 2003, the proceeds can replenish the lump sums.

They should check whether the underlying funds in their investments are still appropriate or whether they need more income but should keep more savings in cash.

They have too many eggs in one basket and should diversify their portfolio to include other companies and funds.

Danielle Leich works for accountant PriceWaterhouseCoopers.

Adviser 2: Anna Bowes

John should keep some of the cash payment for emergencies until he knows that he will be earning enough to live comfortably. Any capital he will not need over the next five or so years can be invested for growth now and switched in retirement to help supplement his income.

For a UK fund, I recommend the Chase Fleming Premier Equity Growth for a modest risk, or the ABN AMRO UK Growth fund for higher risk. When he receives his separation lump sum, he should use his Isa allowances in both good growth and income funds.

We recommend the Fidelity International and Extra Income funds. He can improve on the Woolwich rates by investing up to ?3,000 in a cash Isa. The best rates available are via the Internet, with www.smile.co.uk paying 7.25 per cent. Outside the internet, Cheltenham & Gloucester pays 6.75 per cent. He should continue the Windsor Life maximum income plan if he can afford to, as charges are deducted at the beginning.

The select investment policy is also a regular-savings qualifying policy. If it has now matured, he can withdraw it without penalty or tax liability, or he can draw an income without paying higher-rate tax. But he may do better waiting until he has a clearer picture of the near future.

He should review his investment funds to ensure they are performing well. If they are not, he should transfer to a better performing investment, making use of his tax- free allowances.

Anna Bowes works for Bath-based Chase de Vere.

Advice is for guidance only.

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