<i><b>Investments might not be as safe as houses</b></i>

by Lesley Wright
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The Independent Online

The couple are concerned that they don't have adequate pension provision. Diana is taking a career break from teaching, so her pension is on hold. However, they are hoping to retain their house in Oxford, currently rented out, for retirement security while using the equity to buy another property to live in once Chris starts working.

The couple have two cash indiviudal savings accounts worth a little under £5,000, and no debt. They hold bank accounts at First Direct and Royal Bank of Scotland.

We asked Darius McDermott of Chelsea Financial Services, Harriet MacKenzie-Williams of PI Financial Dixon Sutcliffe, and Sarah Windsor- Lewis of Punter Southall Financial Management for their advice.

 

BANKING

Darius McDermott thinks it might be time for Chris and Diana to look at switching their current accounts to providers with more competitive rates of interest. Their First Direct and Bank of Scotland accounts are not the best on the market, and they could profit by switching to another bank.

If they were to move to a Smile current account, their cash would earn 3.25 per cent interest compared to First Direct's highest rate of 1.98 per cent and Royal Bank of Scotland's standard 0.10 per cent.

This isn't a pressing priority as the couple don't hold large sums in their bank accounts, but every penny helps.

 

PENSIONS

Diana's pension scheme, a final salary plan run by her local education authority, is extremely valuable, according to McDermott, as very few employers offer final salary options these days. But he stresses that making additional provisions for retirement, as opposed to depending largely on the property market, should be a priority once Chris has secured a full-time position.

Harriet MacKenzie-Williams agrees that relying on one asset-class makes the couple's approach high risk - there is nothing to fall back on if the value of their property takes a tumble.

However, the fact the couple are investing over a longer period of time will automatically negate some of the risk. Even so, while remortgaging and taking advantage of equity release to purchase another property is a growing trend in the housing market, prices go down as well as up. The Burtons should therefore not rely solely on a second property as their pension, and should make alternative savings to offset the risk.

As Diana is no longer employed by a school, she can't top up her occupational pension plan right now. If any spare cash is available, Sarah Windsor-Lewis suggests Diana considers making a single contribution to a stakeholder pension. As with other private pension plans, Diana would receive tax relief of 22 per cent on any contribution she makes.

As the Teachers Pension Scheme is such good value, it wouldn't be advisable to transfer the frozen benefits elsewhere. Diana may go back to teaching and make further savings. In any case, the scheme offers an excellent deal in retirement, which would be tough to beat elsewhere. Each year, her defined benefits in retirement will increase by the limited price index.

 

SAVINGS

McDermott recommends building up savings in the cash ISAs because they provide instant access to cash in an emergency, and Chris and Diana are probably not ready to be investing in more long-term assets.

The cash ISAs themselves could be moved to another provider to boost returns. Smile's cash ISA rate is by no means the worst in the market, at 4.25 per cent, but there are a number of providers offering 5 per cent or better on £1,000 or more of savings.

Intelligent Finance, for example, offers 5 per cent, while Yorkshire Building Society pays 5.20 per cent. The latter account is operated over the internet in the same way as the Burtons' existing Smile ISAs.

 

MORTGAGES

Windsor-Lewis points out that the couple have a £75,000 repayment mortgage, on a property worth £175,000. By remortgaging on a buy-to-let basis, they could get access to some of this equity as well as increasing the tax efficiency of mortgage repayments. She thinks they could release £122,500 - based on a 70 per cent loan to value - with £75,000 needed to clear the initial mortgage.

That would leave £47,500, which can be used for the purchase of the second property. From this, the couple need to keep back £10,000 to help cover the stamp duty, legal fees and other associated costs.

 

PROTECTION

McDermott thinks that once Chris enters full-time employment, it would be worth considering taking out insurance policies to protect the couple. Should Chris and Diana have children, they will certainly need better insurance to guard against ill health.

In the meantime, the couple need to take out term assurance - the most basic type of life insurance - as a matter of urgency. As it stands, if anything were to happen to Diana, Chris would be unable to pay the mortgage. But for approximately £30 a month, a term assurance contract spread over the remaining life of the mortgage would buy the peace of mind of knowing that the payments are covered.

MacKenzie-Williams suggests that the Burtons make a will. Buying more property, together with any inheritances received, will push them into the inheritance tax bracket, and without a will their final estate may not be inherited by those they wish to.

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