WITH a large house, two salaries, two cars and the funds for £4,000 trips each
summer, the King family is not used to financial worries. But their budget
will tighten considerably next January, when husband Alan retires from
teaching after 33 years.
The 59-year-old, who lives in Worthing, West Sussex, with his wife, Sue, 43,
and sons Jack, 15, and Sean, 6, is keen to ensure that savings and
investments of more than £60,000 are best placed to support their lifestyle.
“I have no idea where to start,” he says.
On retirement, Alan will forfeit a salary of £41,000 for a teacher’s pension
of £16,800, plus a £50,000 lump sum. Sue, like Alan, teaches geography at
the local school, on a salary of £34,000 and will continue until retirement
in 2015.
The couple hope to cut back their commitments this year, starting by paying
off the mortgage on their £400,000 home at a cost of about £8,000. For now,
this costs £1,250 a month on a Halifax tracker deal, which includes £500 in
overpayments.
Other monthly outgoings include £1,250 on “everyday shopping” and utilities.
Alan admits that neither he nor Sue spend much time comparing prices: “We
just buy what we want at the supermarket because we are used to a decent
income. When it comes to switching utilities, we’re stumped. We switched to
EDF last year to save money. Now, of course, it has increased prices.”
Extravagances are Alan’s £30-a-week cigar habit – something he can “do
without” – and his £70-a-week spend at the pub and on meals out. Every year
the family enjoys a £4,000 holiday to the likes of Croatia and the Canaries,
with “treat” trips farther afield every four or five years.
One possible big trip to come would be to Hong Kong, where Sue spent some time
in the 1970s. “It would be expensive,” says Alan. “We are not sure how we
could fund it.”
Alan and Sue have two cars, a Volkswagen Golf and Peugeot 101, and spend about
£110 a month on fuel. They plan to part-exchange one of them soon, spending
up to £10,000 to upgrade to something bigger. A new roof and bathroom for
their house, both “long overdue”, will cost a further £10,000 to £15,000.
Farther ahead, they would like to be able to help Jack when he starts at
university in three years’ time. “We do want the kids to pay their own way,”
Alan says. “But we would like to offer back-up.”
The couple are interested in student buy-to-lets and would like to know
whether Sue’s salary would secure a mortgage. “If so, this could be free
accommodation for Jack and an investment for us,” Alan says.
Alan is an enthusiastic share-club member. His portfolio is worth £7,500 – up
from £1,000 in 2004, helped by contributions of £60 a month. He also has
£12,768 in a Halifax cash Isa and £8,974 in a “pathetic” Halifax equity Isa,
as well as £5,000 “rainy-day money” in a deposit account. Sue has an
endowment with Scottish Widows that is due to pay £30,000 in 2015.
Both would like to know whether their money could do better for them
elsewhere. They want investments with “security and a good rate”.
Financial CV Earnings: Combined income of £75,000 a year.
Savings: £12,768 Halifax cash Isa, £5,000 on deposit.
Investments: Share-club portfolio worth £7,500, £8,974 in a Halifax
equity Isa. Sue has a £30,000 Scottish Widows endowment, maturing in 2015.
Pensions: Both have teachers’ pensions. Alan retires next year on
£16,800 a year, plus a £50,000 lump sum.
Objectives: To support current lifestyle and improve investments.
The Kings: what the experts say
FINANCIAL PLANNING
1 Dennis Hall, Yellowtail Financial Planning
“Tracker funds should provide low-cost equity exposure but Halifax Isa
trackers have annual management charges of up to 1.5 per cent – hardly cheap
– and are guaranteed to underperform the index. No wonder Alan is unhappy.
“Eventually, the Japanese bulls will call the market correctly and it will
have a sustained recovery, but for the brave optimist, Russia or Brazil hold
more promise right now.
“Although you should not time markets, the short-term outlook is bleak enough
to consider cashing in the equity Isa and repaying the mortgage sooner.
Alternatively, with inflation ticking upwards, consider fixed-interest
funds, though not with the Halifax. If you really must have equities, then
look at Invesco Perpetual’s High Income Fund.
“Finally, have an expert run an eye over the Scottish Widows endowment policy.
Reducing outgoings will be a priority and the policy may have served its
purpose.”
Action plan
Consider cashing in the Halifax Equity Isa.
Look at the Invesco Perpetual High Income Fund instead.
Take advice on selling the Scottish Widows endowment policy.
FINANCIAL PLANNING 2
Anna Bowes, AWD Chase de Vere
“While it is sensible to consider paying off the mortgage and paying for
necessary home improvements, such as a new roof, Alan and Sue have a
relatively simple choice with the rest of their cash.
“They can either spend it on a new car and top up their income shortfall, so
that their lifestyle is unaffected for a while, or they can invest the money
to produce an income that can be sustained.
“In terms of maximising the interest of their current savings schemes,
assuming that their Halifax Isa is on a variable interest rate, they could
move this to the new Icesave Cash Isa, which is paying a very competitive
6.1 per cent gross. The account is restricted to the internet but all
withdrawals are easy-access and without penalty.
“A good choice for rainy-day savings is ICICI Bank’s HiSAVE easy-access
account, which is internet only, offering 6.41 per cent. The minimum deposit
is only £1 and withdrawals are available via the internet or by post.”
Action plan
Move the Halifax Isa money to the Icesave Cash Isa.
Move rainy-day savings to ICICI Bank’s HiSAVE easy-access account.
PENSIONS
Danny Cox, Hargreaves Lansdown
“Alan’s teacher’s pension will be about £1,200 net a month. Once the mortgage
is repaid, and while Sue is still working, their income will be in excess of
their needs. However, there is likely to be a shortfall in income when she
retires in seven years’ time at 50, as they will be reliant solely on Alan’s
pension until Sue’s is payable.
“Sue pays about 6 per cent of her salary into her pension and could make
additional contributions. As benefits under the teacher’s scheme are not
likely to be payable until age 60, I would advise paying into a private
pension so additional benefits could be paid from age 55.
“I would go for a low-cost Sipp which has better investment choices than a
stakeholder – though the latter has capped charges – or a personal pension,
which tends to be somewhere between the two.
“Alan and Sue should continue to save in a cash mini-Isa and look at moving
the money from their rainy-day account into one of these. National Savings &
Investments pays 6.05 per cent on its Direct Isa.”
Action plan Sue to pay into a private pension scheme for early
retirement.
PROPERTY
Mike Simmonds, Savills Private Finance
“It is good that Alan and Sue have taken advantage of overpayments to reduce
their mortgage. As well as saving considerable interest, they will pay it
off early.
“As for buy-to-let, the level of borrowing is usually based on the likely
rental income of the property – rather than their income – which is useful
with Alan retiring next year. For example, a lender may require the rental
income to be 125 per cent of the monthly repayment. If Jack shares with
fellow students, their rent will help to cover the mortgage, but the Kings
must also budget for costs, such as insurance, maintenance and hiring a
managing agent.
“Student buy-to-let mortgages allow increased borrowing because they are based
on room-by-room rent, which is likely to be higher than if you rented the
house in its entirety.”
Action plan
Continue overpayments on the mortgage.
On a buy-to-let mortgage, budget for property running costs.
LINKS
Yellowtail Financial Planning: 020-7933 8670, www.yellowtail.co.uk
; AWD Chase de Vere: 0845 140140, www.awdchasedevere.co.uk
; Hargreaves Lansdown: 0117-900 9000, www.h-l.co.uk
; Savills Private Finance: 0870 9007762, www.spf.co.uk
Alan’s response
“THE experts came up with some excellent advice and we have a lot to consider.
What I sensed, but went unsaid, is that people are wary of equities now,
which is not surprising given the FTSE’s latest dive.
“I am keen to cash in my equity Isa and will consider using that to pay off
the mortgage even earlier, as suggested by Mr Hall. Mr Cox advised us to
move the rainy-day savings to NS&I’s Direct ISA, which we may well do.
Right now I would be very happy with 6.05 per cent.
“We will also look at topping up Sue’s pension. She can put her half of the
money now going into the mortgage into a scheme, but I am not convinced that
Sipps are safe. It is good to know that student buy-to-let mortgages hinge
on potential rental income rather than salary. We may buy something in
Scotland – this country is too expensive.”
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