Breaking down the barriers to early retirement

Michael Titley, 56, is a PC technician living in Sprotbrough, Doncaster, with his wife Alison, 42. He earns £16,681 a year, while Alison earns £16,000 as a technical support officer for Rotherham Council. Michael owns his house, which is worth approximately £180,000. The Titleys have no credit card debt or outstanding loans, and have a significant amount of savings and investments.

In total, Michael has £249,000 across a combination of individual savings accounts, investment plans and managed funds. He is also a member of his company’s final salary pension scheme, paying £100 a month into it, and he has a personal pension with Standard Life worth £26,248, which he’s currently not paying into. He doesn’t have any life insurance or critical illness cover but, through work, he has death-in-service cover to the value of £67,000, and has a will that reflects his current wishes.

Michael is looking to recover from what he deems to be bad investment advice from the banks. He would also like advice on his retirement and wants to know whether he’s in a position to retire early.

Money Makeover

Will Palmer is an independent financial adviser for Atkinson Smith financial planners in Doncaster. He understands that Michael is frustrated with the performance of his investments, which have not made many gains during the stockmarket rally, but believes his expectations were too high when taking into account the type of products he invested in.

Michael has £27,000 invested in two Halifax products (the collective investment plan and personal investment plan), both of which are fully invested in the Halifax cautious managed fund.

“Michael’s attitude to risk scored four [on the risk spectrum], with one being low and 10 high,” says Palmer. “So his investments in the Halifax cautious managed fund are probably still within his tolerance limit, since the fund currently has 52% equity exposure.”

Palmer points out the fund’s recent performance in its sector has been good due to its relatively high exposure to equities (the highest equity exposure in the cautious managed sector is 60%), which means it has done well in the recent stockmarket recovery. Over one year it has risen by 23.33% compared with an average of 15.46%, and is ranked in the first quartile.

But Palmer also notes its performance over three years has not been so good (it has ranked in the third quartile over this period of time).

“Michael feels disappointed with the fund’s performance when he compares it with other funds in the sector,” Palmer explains. “However, he should realise the makeup of funds in the sector is significantly different and so they perform differently in varying market conditions.”

Michael’s other investments have also left him frustrated. He invested £50,000 in Halifax Guaranteed Investment Plans in 2004, and a further £70,000 in 2007. These plans guarantee his capital from the fifth anniversary onwards or 80% of the highest value achieved.

“On the face of it, these offer the perfect solution for the cautious investor,” comments Palmer, “as they potentially can generate better returns than a savings account and provide security for the original capital. However, the underlying fund has been managed with security in mind, and so when the stockmarket recovered, the fund didn’t, as it was – and still is – invested in cash.”

Palmer believes it’s unlikely the fund will move back to an element of equity exposure in the future due to the guarantees it has in place, and considers it an expensive way of holding cash.

Since the management fee of the fund is 1.75% a year, he suggests Michael cashes in both plans and puts his money in a combination of cash funds and an absolute growth fund. But he should keep in mind that savings over £50,000 will not be covered by the Financial Services Compensation Scheme, and spread the money accordingly.

As far as retirement is concerned, Michael has a number of options. At the moment, his outgoings are approximately £800 a month. Palmer has calculated that from his investments alone, Michael could expect to generate £1,041 a month.

This means, if he really wants to retire now, he can maintain his current standard of living without any real struggle and without having to draw on his pension early. However, the terms of his final salary pension scheme mean for each year Michael works for his current employer, he will receive 1/60 of his final salary as a pension.

So far, he has been with his employer for 12 years, and Palmer recommends he stays there until he is at least 60. “If he does this, he’ll build up an additional pension of £1,133 a year,” he says.

He also suggests Michael uses some of the money he has in assets to top up the personal pension he has with Standard Life – currently, the fund is worth £26,248. While he’s working, Michael can contribute up to 100% of his salary to his pension each year.

His employer’s contribution into the final salary scheme can be estimated at £2,833 a year, which leaves Michael with a maximum contribution of £13,848 a year.

“The benefit of making this contribution is that he’ll get 20% tax relief at source and can draw 25% of the fund back as a tax-free lump sum,” adds Palmer.

In four years’ time, for example, if he continued to make maximum contributions and took 25% as a tax-free lump sum, Michael’s pension would be worth £41,544. For a pot of that size, using the open market option and taking into account his age and the fact he’s a smoker, Michael could expect to get an annuity valued at around £2,866.53 a year. He is also in line to receive the full state pension, which he can draw at 65.

“I think Michael is in a better position than he imagines,” says Palmer. “He has to understand that investments can go up as well as down. Generally, investing for the medium term will give better results than cash, but of course the road can be rocky.”

Michael’s To–Do List:

Keep investments in Halifax cautious managed fund to maintain current level of risk

Cash in guaranteed investment plans
Top up pension with money from assets
Decide what age he wants to retire and plan pension funding accordingly


Will Palmer is an independent financial adviser for Atkinson Smith in Doncaster. Visit or call 01302 341 282.


Your Comments

"Palmer has calculated that from his investments alone, Michael could expect to generate £1,041 a month. ..."

That's about 6+% return on 250,000. Would Palmer like to give us a way of obtaining this type of return please. There are literally thousands who are trying to live on their savings who would like to know.