Capital ideas to fund a happy retirement

For anyone who is retired - or facing retirement - there is a conundrum: how to finance the next 20-30 years when your main asset is the property you live in. John and Blom Griffith are typical of the thousands of homeowners who want to boost their income by downsizing their property and investing the resulting capital, so we took their case to four independent financial advisers.

Both retired from careers in teaching and counselling, John, 66, and Blom, 73, have sold their three-bedroom house in London's Peckham, for £459,000. They are about to move to a two-bed flat in Eastbourne costing £212,000.

After moving and redecoration costs, the couple have about £222,000 left to invest, plus £28,000 in savings, including HSBC cash Isas and an Abbey Tessa-only Isa. In all, some £250,000.

They are luckier than some in having pensions that, between them, provide a net total income of £2,000 a month. "This is enough to live on happily day to day but we'd like to invest the £250,000 to give us enough interest to pay for holidays and extras and to let us build up an accessible, emergency fund for major future outgoings like repairs to the flat," says John.

The couple would like a "good proportion" of the money to go into capital-safe investments but are willing to take some risk. They've also considered investing in a buy-to-let property.

Mark Bolland

Chamberlain de Broe

Buy-to-let.....continued below

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would not be suitable for this couple, he says. "It will tie up too much of their cash and property like this is not terribly liquid." As the Griffiths don't want to take too much risk, the bulk of their money should be in cash or near cash, and they may feel more comfortable spreading their assets over a number of banks and building societies.

They should maximise tax efficiency by using their mini cash Isa allowances. They should also keep an eye on National Savings certificates. Equally, they could consider guaranteed income bonds offered by insurance companies. The rate now for a three-year bond is about 4.5% net, which is particularly attractive if base rates come down in the next three years.

"They should be able to get a return of at least £11,000 per year net of tax which would be a very nice boost to their income," Mr Bolland says. "But, of course, if they take it all and spend it each year, there will be erosion of the capital value through inflation."

To counter this, he suggests they invest up to 25% of their capital in funds that give reasonably high yield through a mixed exposure to bonds and equities, such as Invesco Perpetual High Income. The Griffiths should make use of the mini stocks and shares Isa allowance.

Anna Sofat

AJS Wealth Management

Ms Sofat suggests putting 25% of the £250,000 pot into each of four asset classes: cash, fixed interest, property and equity, and using tax wrappers in each case to minimise tax liabilities.

On the cash front, she says they should consider transferring the Tessa-only Isa money to Kent Reliance's mini cash Isa, which pays 5.71%, or Northern Rock's Tessa-only Isa offering 5.8% fixed for a year. They should retain the £23,000 in the cash Isas but look to consolidate this with a competitive provider. Ms Sofat recommends they keep a further £33,500 in cash in an account such as Lansbanki's Icesave, paying 5.7%.

For fixed interest investments, she recommends the Griffiths use their remaining Isa allowances for 2006/07 and maxi Isa allowances for 2007/08 to invest a total of £22,000 split between the Aegon Asset Management sterling corporate bond fund and Axa Framlington managed income fund, earning around 4.5% a year.

They could then put £26,500, sheltered by a tax-efficient offshore bond wrapper provided by the likes of Axa or Scottish Life, into funds from Henderson Global Investors, Old Mutual and Invesco Perpetual. The offshore bond will allow withdrawals of 5% income per annum without an immediate tax liability. A further £14,000 could go into a unit trust which can then be transferred into maxi Isas in April 2008.

"For property, I'd allocate the whole £62,500 via the offshore bond wrapper, as this can provide access to UK property via offshore funds as well as more mainstream UK-based funds." Ms Sofat recommends a mix of funds including the Glanmore property fund and the Matrix property unit trust.

Her recommendation on equities would be £10,000 via the tax-efficient offshore bond into the Invesco Perpetual High Income fund; £2,500 into the Schroders Mid 250 fund; plus £10,000 each into five structured products where your capital is protected but there is scope for capital appreciation.

Mark Dampier

Hargreaves Lansdown

He recommends adding more to the Griffiths' existing capital-safe savings to build up an accessible emergency fund, and suggests £25,000 in Birmingham Midshires's Direct account, paying 5.5%. Some £40,000 could go into National Savings index-linked certificates.

Another £40,000 should go into two managed, fixed interest funds producing 4.5%-5% gross. Mr Dampier suggests strategic bond funds from fund management groups Artemis and Henderson Global Investors. "I'd also discuss with them the possibility of investing £30,000 in premium bonds, which give a notional return of 3.6%."

As for the remaining £100,000 or so, Mr Dampier suggests they invest it in a straight equity-income portfolio. "The yields may be only 2.5%-3% net, but the beauty is that the objective of these funds is to grow capital and thus grow future income, which is the same objective as that of most people in retirement and exactly the type of long-term attitude this couple should have."

Mr Dampier suggests making use of their equity Isa allowances and using a spread of income funds from managers including Artemis and Jupiter.

Brian Dennehy

Dennehy Weller & Co

The amount on deposit seems a reasonable sum to cover emergencies, and the Griffiths need to ensure this also covers any planned expenditure.

"Suppose their holidays cost them £7,500 a year, including spending money, and there might be another £2,500 each year of 'extras' like Christmas. To cover the next five years, put £50,000 of the £222,000 on deposit, and draw down the £10,000 each year as required. That frees up the remaining £172,000 for investment without having to be too fixated on the income."

Looking at capital-safe investments, Mr Dennehy likes the Barclays Guaranteed FTSE Tracker Account where your capital is 100% protected over five years. On maturity the proceeds, or some of them, can begin the "holiday fund" for the subsequent five years. Mr Dennehy suggests the couple invest £50,000 each into this fund.

A further £50,000 can be earmarked for Isas over the next three years, as a minimum. The investments can take place now into the Griffiths' chosen funds, and then these can be transferred into the Isa wrapper each tax year.

The funds could be a mix of strategic bond funds and equity income funds. The balance of £22,000 can be invested into deposit or equivalent accounts.

j.papworth@guardian.co.uk