The majority of people are in debt to some extent. Given the explosion in personal debt over the last five years or so many people are now paying the majority of their income to service debts.

The strange thing is that many of the people that I meet are in this position but are also paying into savings plans of one sort or another. They seem to be quite happy to receive returns on their savings of a few percent or even worse whilst paying as much as 20% interest on credit cards and store cards.

Thankfully, it is surprisingly easy to become debt free. It’s just a question of having a plan and prioritising your debts.

In order to start reducing your debts you do need to have a surplus of income over expenditure. If you find that all of your income is gone at the end of the month you need to examine your expenditure to see where you can make savings. For example if you have a mortgage can you save money by remortgaging onto a lower rate? Can you save money on your Gas and Electricity costs by moving to another supplier?

If you have Buildings and Contents Insurance perhaps you may be able to save by moving to another provider. Check to see if you can save on any Life Insurance premiums but make sure that any replacement will provide the same benefits and don’t cancel your existing plan until the new plan is in place.

For most people it’s not too difficult to save a reasonable amount simply by shopping around.

The next step is to prioritise your debts. You should focus on the debts with the highest interest charges first. So for example if your most expensive debt is a credit card to which you are currently paying £100 per month, you should now increase your monthly payment of this debt by as much as you can afford from your income surplus. In the case of credit cards you can accelerate the repayment by transferring the balance onto a 0% card.

Once your first debt is paid off you should now focus on the next most expensive debt by transferring the entire payment from your first debt onto the second debt.
So for example if you were paying £200 per month on your first debt and you are currently paying £100 on your second debt the new monthly payment on your second debt will now be £300.

As you can see because the monthly repayment from previous debts is transferred to the next debt the amount available for repayment increases rapidly as debts are repaid.
Once debts such as credit cards, store cards and personal loans have been discharged you may wish to consider using part or all of your increased surplus to discharge your mortgage.

It is not unusual for a 25 year repayment mortgage to be paid off in 7 or 8 years simply by making a regular over payment.

Just imagine being totally and utterly debt free. With a significant monthly income surplus you can now make serious saving and investments whether for your retirement or to buy a new home in the place of your dreams.

I am constantly surprised by the number of clients that I meet who are disappointed by the performance of their Pension Plans and Investments.

Indeed many people will not consider Pension Plans because they feel that they are expensive, provide poor returns and only really benefit the provider and the financial adviser.

There is of course an element of truth in this belief. Generally speaking the returns from pension providers own internal funds are below average. This is also true of funds operated by the major banks.

The focus over recent years has been on fund charges culminating with the advent of Stakeholder Plans. These plans were available with a maximum charge of 1% per annum which has recently been increased to 1.5% per annum.

The Labour Government set up Stakeholder Plans to encourage people to make their own retirement provision instead of relying on the state for their retirement income. It was thought that one of the main reasons why people had failed to make adequate provision for their retirement was that they were put off by the high charges carried by Personal Pension Plans. Clearly this was not the case given the poor take up of Stakeholder Pensions.

So for many years the main focus of Pension Plans was charges but surely this is only one half of the story. Isn’t the investment return also important? Well of course it’s absolutely vital. It is the return net of charges which is important which means that an above average investment return is absolutely essential.

So how do you consistently achieve above average returns over the longer term?

It’s really about adopting an investment process which will determine your own unique tolerance to investment risk. After all not everybody has the same appetite for risk and therefore this should be assessed at the outset.

Once you risk profile has been determined then a portfolio of several investment area’s or Asset Classes can be designed. This will probably include Shares, Property and also Government Bonds and may also include Hedge Funds and Commodities. As the risk profile increases so you will see an increase in the proportion of Shares in the portfolio and ice versa as the risk profile decreases.

Once the Asset Allocation has been achieved the next stage in the process is to select the best available fund or funds with that sector. For example if your portfolio requires 30% UK Equity it may be beneficial to split this between two funds, perhaps an Income Fund and a Growth Fund. The final choice of fund is usually determined by such factors as the funds risk/return ratio, it’s volatility and the consistency of the return over perhaps 1,3 and 5 years.

Finally it is also important to ensure that the funds selected within your portfolio are not directly correlated. That is to say that they do not react in the same way to market movements. For example a portfolio containing only shares albeit geographically spread is likely to suffer more in a market downturn that a portfolio made up of diverse asset classes such as property and bonds.

Once you have invested it is essential to monitor the performance of your portfolio at least twice a year. Bear in mind that because the various elements of your portfolio are likely to grow at different rates the proportions of the different asset classes will change relative to each other. In order to maintain the initial risk profile it is essential to rebalance your portfolio at least once a year.

Using this method of portfolio construction and carefully selecting the best available fund within the asset allocation provides the best chance of out performing sector average returns.

If you are approaching retirement you are probably looking for ways to generate a guaranteed income. You are perhaps aware of the many deals on offer from High Street Banks and at the time of writing you can secure interest of around 6.5% per annum gross which provides a net income of 5.2% to a basic rate tax payer.

Depending upon your age, state of health and your marital status you can generate a significantly higher guaranteed income for the rest of your life largely thanks to Her Majesty’s Revenue and Customs.

This is known as an Immediate Vesting Annuity and is simply a lump sum investment into a pension plan from which the tax free cash is immediately withdrawn and the balance of the pension fund is then used to buy a lifetime annuity.

In the first example lets assume that a male 60 year old basic rate tax payer wishes to invest £10,000 into a personal pension plan. As a basic rate tax payer the cost of a £10,000 pension contribution is £8,000. The pension fund however now stands at £10,000 from which the member can withdraw 25% or £2,500 as a tax free lump sum. With an original cost of £8,000 and the return of £2,500 tax free cash the net cost is now £5,500 but the pension fund stands at £7,500. A 60 year old male non smoker could currently receive a single life level pension of £532 per annum guaranteed for life.

With an actual net investment of £5,500 this represents an income of around 9.7% per annum.

However if we run the same figures for a 65 year old the annuity increases to around £608 per annum which then provides an income to 11.05% per annum. This is now starting to look attractive but this is only based upon basic rate tax relief. If you happen to be a higher rate tax payer the return is astronomic.

Using the same figures the cost of investing £10,000 as a higher rate tax payer is effectively £6,000 and with the return of £2,500 tax free cash the net cost is only £3,500. As with the basic rate tax payer the remaining fund is still £7,500 which will generate the same levels of income as the basic rate tax payer but with the net cost of only £3,500. This then provides an income of 15.2% per annum for a 60 year old male non smoker and a staggering 17.4% per annum for a 65 year old.

I’m sure that you’ll agree that this sounds very attractive but where’s the catch?

The only real downside to an Immediate Vesting Annuity is that you have to give up access to the capital. Because the annuity is funded via a pension plan the capital is tied up within the plan and can only be accessed via the tax free lump sum and then via a lifetime income. In spite of this however if used correctly an Immediate Vesting Annuity can provide a valuable increase to retirement income.