How to make the most of your savings

Carol Willment is a 65-year-old widow from Weston-Super-Mare, Somerset. She used to work in the health service, but retired early due to injury and now works voluntary shifts as a driver for patient transport, for which she receives £1,000 a month to cover expenses such as petrol.

She receives the state widow's pension of £169 a week and has an NHS pension of around £53 a week. Carol lives in the same house as her son, which they have split into two separate flats.

She's the owner of the property, which is worth approximately £230,000, and has no outstanding mortgage.

In terms of savings, Carol has a regular premium individual savings account with LV=, which she pays £40 a week into. She also has a stocks and shares ISA with AXA, which is currently worth £19,325.17.

She has approximately £110,000 spread between premium bonds, fixed-rate savings bonds and investment bonds, with a number of providers. Finally, she has £37,000 in a current account with Nationwide.

Carol wants to maintain a good standard of living into her old age, but is not sure how to make the most of her money.

Expert response:

The first thing Sally Thompson, independent financial adviser at Sage Independent Advisers, based in Weston-Super-Mare, established was how much Carol should have in a readily accessible account.

Carol felt a cash reserve of approximately £6,000 would be adequate cover for any unexpected expenses, so Thompson suggested she maintained this rather than the £37,000 she currently has.

She identified that Carol's main objectives are to achieve capital growth over the medium to long term, to take advantage of tax-efficient investments and to generate higher returns from her capital than a bank or building society deposit account could offer.

To find the best route for Carol to achieve this, Thompson went through a risk assessment with her.

This showed that Carol is a balanced investor, who Thompson describes as "someone who would like to take advantage of equity investments with the potential for good long-term gains but who can accept increased short-term volatility".

Thompson therefore recommended Carol hold a diversified portfolio, which could include everything from cash and bonds to stocks and shares.

She adds: "Carol currently has what appears to be a fairly well-diversified portfolio but she hasn't had any recent reviews.

"I would advise her to conduct an in-depth review of her portfolio to ensure she maximises her investments and minimises the amount of tax she pays. Over the years, what may have appeared to be a good choice at the time, may not be so now."

Ways to maximise savings

One example Thompson gives is Carol's cash ISA, which may no longer be providing a good rate of interest. "If necessary, Carol's ISA can be transferred straight to another provider to avoid losing the tax-free status."

The best way for Carol to do this would be to find an ISA that suits her needs and, assuming it accepts transfers, approach the provider to request it to take care of the paperwork.

Since HM Revenue & Customs introduced new guidelines in 2008, transfers have been much smoother, but she should bear in mind that she can only transfer her current tax year allowance in full, whereas previous year's ISA savings can be split between accounts.

She should also make sure she uses her full ISA allowance for the current tax year (£10,200) by investing in more stocks and shares.

Thompson says: "I've recommended an ISA in order to provide Carol with capital growth potential while making use of the valuable tax concessions."

At the moment, Thompson recommends she picks a growth fund, such as the M&G Recovery or Henderson Multi-Manager Growth fund.

However, if Carol is seeking income further down the line, Thompson says she could easily switch to an income-generating fund – for example, the M&G Income or Henderson Multi-Manager Income and Growth fund – while maintaining the tax protection offered by an ISA.

"When choosing a product or fund Carol should consider the charges, performance and financial strength of the company, as well as the size of the fund and its volatility, the experience of the fund manager and its administration," adds Thompson.

Next, she says Carol should review the investments she's already got to ensure they're still achieving her objective and continue to suit her attitude to risk. By doing this she can decide if she wants to move her money or switch to different funds offered by the same company.

She'll also be able to decide if she wants to put some of the cash sitting in her current account into one of her savings bonds – or another type of product.

In terms of taking an income from her fixed-rate investments, Carol can elect to do so monthly, six-weekly, quarterly, four-monthly or annually.

"As long as her withdrawals don't exceed the rate of growth, her investments will still have the potential to increase in value," says Thompson.

"However, by reinvesting the distributions, their growth potential will be enhanced still further – although she must bear in mind that the value of investments can fall as well as rise."

All proceeds from Carol's fixed-rate savings bonds will be net of income tax and are not liable for capital gains tax since both will have been paid within the fund.

Thompson says the bonds won't need to be declared on Carol's tax return either, provided the income she takes is not in excess of 5% a year, and as long as the reinvested distributions don't exceed 5% a year.

Thompson adds that bonds also have an added flexibility: they can be put into a trust to assist in inheritance tax planning, either at the initial application stage or at a later date.

But she advises Carol to seek expert advice if she decides to set up a trust because access to capital could be forfeited, or it could fall back into her estate, depending on the date she sets it up and the date of her death.

Carol found the makeover worthwhile and says Thompson was very efficient. "I was very impressed; she gave me some good pointers," she adds.

Sally Thompson is a certified financial adviser for Sage Independent Advisers (01934 811 945)

If you would like a money makeover from Moneywise, get in touch here, and you too could meet up with an IFA in your area.