Should we buy a flat and be less broke?

Ruby and Nick Lescott
Ages: 60 and 63
Live in: South-east London
Occupations: Retired
Earn: Joint income from pensions - ?17,300
Mortgage: None
Debts: None
Investments: Property, Peps, Isas, Tessas and
savings account
Pension: Previously members of an occupational
scheme, also personal pensions
Aims: To find out what to do about an endowment that
is a burden and whether it is wise to cash in savings
and buy another property to let

Ruby and Nick each have a teacher's pension but they would like more income. Ruby was a special needs and literacy teacher before retiring. Nick gave up teaching when he was 50 to write books but had already spent years working part time.

'A great mistake that was,' says Ruby. 'We did not realise that a final salary pension is based on your last three years' earnings. This meant Nick got a pension based on his part-time earnings only!'

Having learned this lesson, Ruby made sure that during her last three years at work she earned as much as she could. Even so, now that Nick is no longer writing, they are finding their pensions not stretching far enough.

They do have another source of income - the rent from a flat they bought when Ruby retired seven years ago. This was financed partly out of Ruby's retirement lump sum and partly with a mortgage, which is now paid off. The flat provides a reliable income and has risen in value.

They paid off the mortgage on their own home with some money they inherited. Although they were intending to continue the endowment policy, the premiums of £132 a month are unaffordable. It is a Sun Life of Canada unit-linked policy that is not due to mature until 2013.

Ruby says: 'We are considering selling it but as it is only eight years old we are worried we will end up having to pay tax on the £10,000 lump sum we would get. We can't decide now whether it's worth struggling on with the policy.'

Their other savings in-clude two Peps, invested in Legal & General's Index Tracker trust and the NPI Global Care fund; two Tessas maturing in 2002 and 2003 with Triodos; an Isa in Norwich Union's Higher In-come Plus fund, and three cash Isas, two with Smile and one with Nationwide. They wonder whether they should cash in all their investments to buy another flat.

Ruby says: 'We realise it would probably be better not to cash in our Peps because they are long-term investments, but we now feel that the stock market is more for gamblers and it might be better for us to cut our losses and buy another flat before property prices rise further.'

She says they could buy a studio flat in their part of London for about £60,000 and easily find a tenant.

In two years' time things will look brighter because Nick will receive a state pension and two small pensions he has with NPI and Sun Life will also mature. But they want more income now. 'Which way should we jump?' asks Ruby.

Adviser 1: Gillian Cardy

There are several points for Ruby and Nick to
consider. First their endowment - it is considered
bad practice to sell plans that go on significantly
into retirement because of the affordability issue.

If it has been mis-sold the remedy would be a
return of premiums with simple interest, which
might represent more than the surrender value. If
they do surrender, I do not think tax would apply
as the premiums paid appear to exceed the
surrender value. Making the policy paid-up does
not seem suitable due to the policy's remaining
length.

I would caution them against further property
investment for tax and practical reasons. Rental
income will be added to their other income and
taxed in full. I would also be concerned about
how they will cope with managing the property as
they get older .

I would prefer to see them build up a fund of
investments that can generate tax-free income.
Peps, Tessas and Isas are a good start. They
could also consider starting to take an income
from Nick's personal pensions now and not wait
until he reaches 65. I think the marginal benefit of
another two years' contributions would be small.

The pensions could generate a tax-free cash sum
of 25 per cent of the fund, with the balance used
to purchase an annuity. If they leave the pensions
invested, they should consider a switch to more
secure types of funds, such as with-profits or fixed
interest, to avoid the risk of further falls in value.

Gillian Cardy works for financial adviser,
Professional Partnerships

Adviser 2: Andrew Jones

Nick and Ruby's planning seems to have been
sound. However, there are disadvantages to
property investment. The rental income, less
expenses, is subject to income tax, and capital
appreciation is subject to capital gains tax.
Furthermore, it can take an unpredictable length
of time to realise the capital.

Holding such a large majority of one's assets in
one asset class is also for gamblers, and this is
what they will be doing if they cash in their
investments to buy another property.

To generate extra income, they could consider
transferring their Pep investments to corporate
bond funds. These funds will generate an income
income of perhaps between 6 per cent and 8 per
cent, which is tax free. These investments are
also likely to be less volatile than equity funds,
although they are higher risk than bank deposits.
It is important that any switch be carried out as a
transfer so that the tax-efficient Pep status is
maintained.

As regards their endowment, they should get a
full surrender quotation from Sun Life. If the
premiums are becoming a burden they could
consider stopping them and making the policy
'paid up'. Each company's terms for doing this
vary so they will also need a proper quotation
from the life office before doing this.

On the positive side, if they do surrender there is
unlikely to be any tax payable as the gain is likely
to have been small and their incomes are within
the basic-rate tax band.

Andrew Jones works for chartered accountant
Blick Rothenberg

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