RETIREMENT can seem a long way off when you first start work. Other financial
priorities take over. But once you hit your forties, you start to realise
that there is no time to lose. Barbara Hillier, 41, from Southampton,
certainly feels she needs “to play catch up” to boost her retirement
savings.
She is now contributing 6 per cent of her salary to the Local Government
Pension Scheme but has only been a member of it for five years since she
started her present job working for the police training student officers.
She worries that this pension provision may not be enough.
In the past she worked in jobs without pension schemes and had saved only
£1,000 in two personal pension plans. “Any spare money went on bringing up
my daughter, Samantha, but now she is 21 and more independent, having just
moved into her own flat, I hope to be able to save more.”
She earns £23,151 a year. With overtime, her net monthly take-home pay
averages £1,500. Her main outgoing is her mortgage. She bought her property
with a partner 15 years ago for £54,000 but when they split up a few years
ago, she bought him out. This left her with a loan of £44,000.
The mortgage has another 23 years to run. She currently has a five-year fixed
rate repayment deal with Nationwide at 5.79 per cent. It lasts for another
three years. Officially the repayments are £297 a month but Barbara pays
£350 a month, to shorten the term. Nationwide allows her to overpay by up to
£500 a month without penalty.
Her financial situation will improve soon when she inherites £70,000 from her
mother, who died last November. She plans to use part of it to buy a larger
property: “It may sound strange, to move to a bigger place after my daughter
has left, but I have only a two-bed-room terraced house and I’d like extra
space for guests.” She thinks it might also make a better investment.
She recently had her house valued at £180,000. A three-bedroom property would
cost her a minimum of £210,000, she says. After she has covered the
difference in price and the removal costs, she will have £25,000 to £30,000
left.
She is not sure how best to invest this money. Should she reduce her mortgage
further when her five-year fixed rate deal is up, boost her pension, or put
the money into another form of long-term saving?
Her savings at the moment consist of two tax-exempt friendly society plans
with Police Mutual into which she pays £50 a month. She also saves £100 a
month in a cash Isa with Halifax, where she has her current account.
However, she recently emptied her Isa account to buy a car for her daughter,
who is paying her back at £25 per month.
Her only debt is a £4,000 three-year loan from Virgin at 6.7 per cent that she
also took out to buy the car. Repayments are £92 per month. If she repays
the loan early she will be charged three months’ interest.
She hopes that the car loan will be the last time she has to help her daughter
out financially. From now on she wants to concentrate on herself and invest
for her future security.
Barbara Hillier: what the experts say
MORTGAGES
David Hollingworth, head of communications, London & Country Mortgages
“Paying off a mortgage is a better use of funds than saving — provided there
is an emergency fund in place. It means the cash is effectively earning
interest at the mortgage rate before tax. Barbara would need to earn more
than 7.23 per cent gross to get a better return.
“The early repayment charge would erode some benefit of using the inheritance
to pay off a chunk of the mortgage before the fixed-rate period ends,
although it would save in interest. An alternative would be to increase
overpayments to the maximum £500 a month. Assuming that interest rates
remain the same, this would reduce the mortgage term to five and a half
years.”
SAVINGS & INVESTMENTS 1
Justin Modray, head of communications, Bestinvest
“Barbara should try to rebuild her cash Isa savings as this is a tax-efficient
way to save. The Halifax cash Isa accounts are a bit hit and miss — the Isa
Saver Direct pays 5.3 per cent, but the branch Isa Saver pays only a paltry
3.95 per cent on balances below £3,000. She could look at the Barclays Tax
Beater Cash Isa which pays 6.5 per cent, although this includes a 1 per cent
bonus for the first year, so she could shop around when it expires.
“For peace of mind Barbara should consider repaying more of her mortgage using
the balance from her inheritance.
“As to long-term savings, she could split the money between increased pension
contributions and a stocks-and-shares Isa. She should spread her fund
investments across global stockmarkets, corporate bonds and commercial
property, to reduce risk. She could use a ‘one-stop’ fund, such as Midas
Balanced Growth, or choose individual funds, such as Rensburg UK Select
Growth, Schroder European Alpha Plus, Artemis Strategic Bond and SWIP
Property Trust, to achieve a similar result.”
SAVINGS & INVESTMENTS 2
Philippa Gee, head of investments, Torquil Clark
“When Barbara receives her inheritance she should repay the car loan as the
early repayment penalty will be less than £70. She could use the £92 from
the car-loan repayments to boost her pension through a stakeholder pension,
or additional voluntary contributions, or by buying additional years.
“With around £20,000 left from her mother’s estate after paying off the loan
and moving to her new property, I would suggest spreading it as follows:
£3,000 into a cash Isa for 2007-08, £4,000 for a mini stocks-and-shares Isa
in Jupiter UK Growth, and the rest spread across Invesco Perpetual
Distribution fund, Standard Life UK Equity High Income and New Star Active
Portfolio. The £100 she was paying into the cash Isa she should also save
into equities, say the New Star fund. Finally, Barbara needs to update her
will, to reflect her wishes.”
PENSIONS 1
Tom Mcphail, head of pensions, Hargreaves Lansdown
“By 65, Barbara will have done 29 years’ service, so her scheme pension would
be £8,400 in today’s terms, plus a lump sum of £25,000. The scheme also
offers generous benefits — inflation-proofing and ill-health early
retirement.
“If Barbara put some of her inheritance into a personal pension and retired at
65, she could expect an income of £1,200 a year for life, for every £10,000
invested now. But I suggest she looks first at the option of buying added
years in the Local Government Pension Scheme (LGPS), as this may well
produce a better return for her than investing in a money-purchase pension.
In part, this is because she is a basic-rate taxpayer, but mainly because
added years still tend to be a generous deal. The only down side to this is
that Barbara would be locking most, if not all, of her pension planning into
one scheme.”
PENSIONS 2
Graeme Mitchell, managing director, Lowland Financial
“Barbara’s retirement income may not be as bad as she thinks. She will qualify
for a worthwhile state pension — up to £5,000 a year in today’s terms. She
can get a forecast from www.thepensionservice. gov.uk. The LGPS is a
‘final-salary’ pension that builds up 1/60th of income a year. If she
retires at 65, she will get 29/60ths or, 48 per cent, of final salary. The
two pensions will give a net income in today’s terms of £1,000 a month
(indexed for life) — not much less than she has now after mortgage payments.
“So, I would suggest that rather than invest more in her pension, she leaves
surplus capital on deposit until she can use the penalty-free option to
repay part of the mortgage in 2010. Then she should invest the money no
longer committed to monthly mortgage repayments in cash and
stocks-and-shares Isas, plus stakeholder pensions. This would improve her
early retirement options and retain a handy access to cash.”
LINKS
London & Country Mortgages: 0800 9530304, ww.lcplc.co.uk;
Bestinvest: 020-7189 9999, www.bestinvest.co.uk;
Torquil Clark: 0800 0723186, www.torquilclark.com;
Hargreaves Lansdown: 0117-900 9000, www.hargreaveslansdown.co.uk;
Lowland Financial: 01896 751007, www.lowlandfinancial.co.uk.
Barbara’s response
“The idea of making maximum mortgage overpayments from my inheritance is
appealing as I will still have a pool of money to play with. Shortening the
term takes away the worry of paying a mortgage almost to retirement.
“The pension I have has only been running five years, which troubled me as
there is so much emphasis nowadays on starting pensions early. I will find
out about the possibility of investing extra years to take advantage of any
tax relief that may be available and build up this particular pot. I will
also check my current status regarding state pensions.
“I have always been a low-risk person, mainly because I haven't had much spare
capital. So spreading money over several investments, such as the
stocks-and-shares Isas recommended, is appealing.
“The overall message I got from the panel is to spread my investments and
lessen my future outgoings, namely my mortgage. I will certainly be acting
on the advice which will be invaluable in securing the future for me.”
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