Personal Finance: Plain sailing with a Navy pension

Investment Masterclass: NAMES: GRAHAM AND LINDA NICKLIN AGES: 53 AND 51 OCCUPATIONS: SEA CADET OFFICER AND MOBILE HAIRDRESSER

Graham left the Royal Navy some time ago. His RN pension is index- linked when he is 55 and Linda has a high degree of security with a two- thirds widow's pension.

He also earns a good salary from an enjoyable job with the Sea Cadet Association. This employment has the benefit of a final salary pension scheme in which Graham hopes to achieve around 10 years' pensionable service. Graham's net income covers the household needs with a little to spare.

Linda enjoys her work but is beginning to think of retirement possibly in four years. She has no pension scheme.

The couple own their house. They have around pounds 2,000 in current account, two partly-funded Tessas, a rainy day fund of about pounds 4,000 in an instant access account, pounds 1,000 in a mutual building society, possible windfall benefits, a good quality European PEP, some Woolwich and Norwich Union shares, and a nominal pounds 10 each in cash ISAs which they intend to top up from pounds 26,000 in a 90-day building society account on which they have given notice.

They also contribute pounds 220 a month to endowment policies with maturity dates between 2001 and 2008.

Graham and Linda feel they can invest pounds 150 a month in addition to their existing endowment policy premiums. They do not like to take big risks.

The adviser: Roger Knowles, regional investment manager at Whitechurch Securities, independent financial advisers in Bristol (0117 9442266)

The advice: Their financial position in eventual retirement looks solid. The index-linked Royal Navy pension will add more than 150 per cent to the basic state pension. Additionally, there is the Sea Cadet Association pension.

The rainy day fund of around pounds 4,000 is earning a pitiful interest rate. I suggest a good postal/phone instant access account, preferably one that has a direct link with their current account. An example would be the C&G Direct Transfer Account.

Firstly, we must consider the wish to top up the two Tessas. This will require pounds 4,800 over the next two or three years. It is a shame the two cash mini-ISAs were opened because this has reduced the potential for long-term tax efficiency via investments with greater potential.

But it is done and the tax benefits should now be maximised. This will require an input of pounds 6,000. It could be argued that the pounds 4,000 rainy day fund is on the low side, but the pounds 6,000 cash ISAs are liquid and could be utilised in the event of a real emergency.

So, of the pounds 26,000 from the building society, pounds 19,000 needs to be placed in a good postal/phone account. This leaves pounds 7,000 available for long- term investment, plus pounds 270 per month. This includes pounds 120 available from buying a car cash, instead of taking out a loan.

How much risk should the couple accept? Ignoring the endowment policies, 50 per cent of their money is in cash-linked accounts. This is very high. The endowments are low-risk, middle-ground holdings. Although Linda might retire in four years, Graham's income is adequate for their needs, so this should not cause problems. The need is to grow capital until Graham is 65, at which point an investment can be converted to provide income provision.

I suggest Graham and Linda invest the pounds 7,000 and the pounds 270 monthly in the stockmarket. They have pounds 10,000 in equities, 20 per cent of their liquid capital. I suggest the pounds 7,000 be invested into good-quality UK equity funds, mostly via their mini-ISA allowances. These will give them exposure to many other companies and sectors. My choices would be pounds 3,000 each in Newton and Jupiter Income fund Mini-ISAs. These have complementary styles, consistent management and excellent records. The other pounds 1,000 I would put to Jupiter UK Smaller Companies, managed by the highly regarded Adrian Paterson of Jupiter Primadona fame.

For the monthly investment I suggest we seek international exposure. My choice would be Templeton Growth. About pounds 170 a month should go there. For the remaining pounds 100 a month, I suggest pounds 50 per month to each of Henderson Technology and Templeton Emerging Markets investment trusts, both relatively high-risk and volatile. We are looking at 12 years until Graham's retirement. Risk tends to be rewarded over the long term, and the greater the risk the greater the long-term potential. By investing monthly you buy more when prices are low (cheap) and less when prices are high (expensive). Graham and Linda face periods of disappointment but I urge them to keep investing, because they will be buying cheaply.

The Independent is offering a free Guide to High Risk/ High Reward Investment, outlining the most frequent ways savers can obtain higher-than-average returns. The guide, sponsored by Whitechurch Securities, is written by Nic Cicutti, the personal finance editor at The Independent. Call 0800 374413 to get yuor copy

If you would like free financial advice on how to invest a cash lump sum or regular savings, write to Nic Cicutti, Investment Masterclass, The Independent, 1 Canada Square, Canary Wharf, London E14 5DL. You must be prepared for your name and picture to appear