Christine Cole, 53, wants to be able to retire within the next ten years and,
with this in mind, she would like reassurance that she has the right balance
with her finances.
Christine separated from her husband in November last year and moved into her
own three-bedroom detached home in Bury St Edmunds, worth about £230,000.
She earns £22,000 a year as an office manager in a job that she started this
summer. “I think that my money is doing OK,” she says, “but I would like to
be more focused and have a ten-year plan going forward to retirement.”
Her biggest dilemma is whether to pay more off her £30,000 mortgage or put
more into saving for retirement. If she tries to pay off the loan, can she
afford the extra repayments? If she puts more money into savings, how much
extra will she need to invest? And is ten years a realistic time frame, or
should she delay retirement a while longer?
“Clearing the mortgage will mean that I retire debt-free, but then the
question is whether I will have enough to retire on,” she says.
Christine’s mortgage is a variable-rate offset deal from Yorkshire Building
Society, currently charging 6.5 per cent. She is repaying £250 a month,
which includes an overpayment of £40 to help to clear the loan “as soon as
possible”, although the term is 20 years. With interest rates rising,
Christine wants to know if she should increase her overpayments and is
wondering how much she would need to overpay to clear the debt in ten years.
The loan is offset against savings of £9,000 in a standard Yorkshire savings
account. although Christine says that she wants to use some of the cash –
about £3,000 – for home improvements.
Christine has £8,000 saved in a Nationwide cash mini-Isa that pays 5.55 per
cent. “Should I transfer this to the offset savings account or leave it
where it is because it is tax-free?” she asks. She also has 1,100 shares in
Standard Life, but says that she is not interested in investing any more in
the stock market.
Wariness of pension schemes means that Christine has invested only the minimum
in retirement funds. She is not paying into a personal pension at the
moment, but she has a small personal pension pot of £18,000 with Standard
Life and £15,000 in a stakeholder with a previous employer, which she is
transferring to her new company.
She says: “I am so mistrustful of pension funds after all of the terrible
things that have happened to other people’s funds. I prefer to put my money
into Isas because it feels safer. That way, I also have money to hand if the
boiler blows up.”
She is fully paid up on her state pension, which she will receive when she is
62 years and 9 months old. “Ideally, I would like to retire by then,” she
says. Her plans for retirement are modest. “As long as I have enough to pay
the bills on my house, enjoy the garden and take the odd holiday to places
such as Asia and the Maldives, I’ll be happy.”
Christine has no debt on credit cards or personal loans and there will be no
financial proceeds from her divorce. She has two adult sons, but both are
financially independent.
Financial CV
Earnings: £22,000.
Savings: £8,000 in a Yorkshire Building Society savings account,
offset against the mortgage. £9,000 in a cash Isa.
Investment: 1,100 shares in Standard Life.
Pension: £18,000 in a personal pension from Standard Life and £15,000
in a stakeholder plan.
Objectives: To pay off the mortgage within ten years, optimise savings
and have enough money in retirement.
Christine Cole: what the experts say
SAVINGS
Robin Amlot AWD Chase de Vere
“To clear £30,000 over ten years on Yorkshire Building Society’s offset
tracker would cost £341 a month, without offsetting the savings. With £9,000
of offset savings in place, the target monthly repayment comes down to £313.
“I applaud Christine’s £8,000 savings in the Nationwide cash Isa, but at 5.55
per cent the interest rate is doing her no favours. If she were to transfer
£5,000 of this into her offset savings account, it would bring down the
target repayment to clear the mortgage in ten years to less than £299.
Putting all her Isa savings into an offset savings account would bring it
down to £290.
“If Christine increased the funds in her offset account, the effective
interest rate that she would receive as a basic-rate taxpayer is
significantly higher than she could achieve elsewhere. The equivalent
savings rate on the society’s offset tracker is 7.75 per cent, which is much
more impressive than her Nationwide cash Isa and better than standalone
regular savings accounts.”
Action plan Transfer £5,000 from Christine’s Isa to her offset savings
account with Yorkshire Building Society.
MORTGAGES
Rob Clifford mortgageforce
“By offsetting, Christine avoids paying interest of 6.5 per cent on £9,000 of
her mortgage. Overpaying is always beneficial because any reduction in the
mortgage term also brings savings in the overall interest paid.
“If Christine utilises £3,000 of savings, this leaves £6,000 to offset, or to
use to repay a chunk of her mortgage. A mortgage of £24,000 over an
eight-year term would cost her about £328 a month, which is only £78 more
than she now pays.
“If she does this, she should consider deals lower than 6.5 per cent, but be
wary of offers that last for two or three years and then revert to a
lender’s standard variable rate. Attractive options include Nationwide’s
lifetime tracker, with no fees, at 5.99 per cent.”
Action plan
Use £6,000 of savings to pay off a chunk of the mortgage.
Reduce mortgage term to eight years by overpaying £78 a month.
PENSIONS
Tom McPhail Hargreaves Lansdown
“I suggest that Christine works out how much income she will need when she
retires, including what all her weekly outgoings will be.
Retirement at 62 is relatively young, so she should be mindful of the effect
that inflation can have over the long term. I suggest that she thinks of her
financial plan in terms of thirty rather than ten years.
“The current full basic state pension is £87.30 a week and, assuming Christine
has a full record of paying Class 1 national insurance contributions, she
can expect a state second pension as well. She may receive about £65 a week,
but she should check this with the Department for Work and Pensions on 0845
3000168.
“Her private pensions should produce an income of about £35 a week. All these
add up to a prospective income of a little less than £10,000 a year.
However, I must emphasise that these are estimates.
“Her Standard Life shares could be paid into a pension, either to be kept as
Standard Life shares or to be reinvested into investment funds. Basic-rate
tax relief means that she could immediately increase the value of the shares
from about £3,162 to £4,053.
“If her employer offers her membership of a pension scheme, she should take
it, even if it means having to put some money in herself. An extra 10 per
cent of her income paid into a pension for the next nine years will give her
an additional £15 a week in pension.”
Action plan
Work out desired retirement income.
Check state pension entitlement. Move Standard Life shares into a pension.
Join employer’s scheme.
EQUITY RELEASE
Dean Mirfin Key Retirement Solutions
“In real terms Christine has a short amount of time to generate considerable
savings. But she does have the advantage of being able to call on the value
tied up in her property. At the age of 62 she could release about 30 per
cent of her home’s value through equity release.
“If she wants a stable monthly income, she could invest some funds and buy a
pension annuity. She would attract immediate tax relief and could take up to
25 per cent of the gross figure out of the fund.”
Action plan
Consider releasing 30 per cent of the value of her home at 62.
Buy a pension annuity when she retires.
LINKS
AWD Chase de Vere: 0845 7959112, www.awdplc.com
; mortgageforce: 0800 0831006, www.mortgageforce.co.uk
; Hargreaves Lansdown: 0845 3450016, www.h-l.co.uk
; Key Retirement Solutions: 01772 508530, www.keyrs.co.uk
Christine’s response
“The differing interest rate figures certainly made me sit up and take notice.
I shall move most of my Isa savings into an offset savings account to take
advantage of the ‘higher’ rate and thus reduce the mortgage term. I can
afford to increase my monthly mortgage payment, perhaps not by as much as is
recommended, but every little helps.
“I am reluctant to change mortgage lender, although I will investigate the
Nationwide lifetime tracker, especially as it has no fees.
“I shall be requesting a state pension forecast to help me to plan and am now
paying 5 per cent of my salary into my stakeholder pension, which is matched
by my employer. I shall find out more about investment funds before
considering putting my Standard Life shares into them as this option does
not immediately appeal to me.”
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I think it quite strange to cash in the cash ISA's as this money can never be put back. The halifax at this time offers a fixed rate cash ISA for 4 years paying 6.5% nett which is 7.93% gross if you allow for basic tax. It would make more sence to transfer the ISA and let the interest compound. This interest could then be taken as an tax free income in retirement.
Steve, Bury St Edmunds, Suffolk