SALLY AND Michael are newly-weds. They earn pounds 19,700 and pounds 19,500 respectively, and currently have a disposable income of pounds 750 per month. Sally recently sold her property and used the proceeds to redeem the mortgage on Michael's house where they now live.

She pays pounds 50 a month to a Perpetual PEP (on last valuation worth over pounds 18,000), while he contributes pounds 46 per month to a Scottish Mutual low- cost endowment plan. Sally has pounds 3,000 with a building society and Michael has stocks and shares worth pounds 2,000. They will move house next spring, but are unsure whether to sell or let Michael's property, now mortgage free. In addition they both wish to retire early and, although they both see their long-term future with their current employers, neither wishes to work until 60.

The adviser: Paul Hegarty. principal of Sett Financial Management, independent financial advisers: 190 Leeds Road, Kippax, Leeds (0113 287 4832). A member of DBS Financial Management, a network for IFAs.

The advice: Sally and Michael are considering letting their current property. Michael feels rental income of pounds 350 per month is achievable. The property's current value of pounds 37,000 is pounds 500 less than when originally purchased.

First, rental income will be taxable but with the ability to offset costs of wear and tear. On eventual disposal of the let property, special Capital Gains Tax (CGT) rules apply.

Where a let property was previously the owners' main family home, up to pounds 40,000 of gains can be exempted. Each spouse can claim the exemption, so transferring ownership to joint names may be necessary in future years.

Second, they need to consider how they would manage financially if the property were unoccupied for a period. If they decide to let Michael's property they will need to borrow perhaps pounds 30,000 more than would have otherwise been the case. Whilst 100 per cent mortgages are available, I recommend that they find a deposit of at least 10 per cent of the intended purchase price of pounds 90,000.

The deposit, stamp duty and other costs could be provided by considering encashing part of Sally's PEP, her building society account, selling Michael's shares and saving their disposable income in a high interest account.

Borrowing 90 per cent avoids the need (with most lenders) to pay an indemnity premium, which could be up to pounds 2,700 based on a 100 per cent loan. Indemnity premiums are one of the costs of high loan-to-value borrowing. Most lenders also have better mortgage deals for those borrowing 90 per cent or less. Capped rates represent good value with lower initial payments and the ability to benefit when rates fall .

But beware of any penalties that overhang the capped period, as these restrict the possibilities of re-mortgaging or negotiating further advantageous rates.

Worryingly, Michael was told by a building society that he couldn't use his current endowment policy in conjunction with a future mortgage. This, of course, is untrue. Sally's PEP can also be incorporated as a repayment vehicle.

Sally's monthly contribution to her PEP will cease from next April when Individual Savings Accounts are introduced. Perpetual will contact her to invite her to continue contributions to an ISA. Michael's endowment matures in 14 years time and arranging the new loan over this period, while costing more, will help Michael and Sally accomplish their aim of retiring early.

Sally and Michael both belong to their employers' pension schemes. A full description of Michael's scheme was not available at the time of our meeting and his options cannot therefore be discussed in detail. Both schemes provide life cover of three times salary for Michael and one times salary for Sally.

Sally wants to know what benefits she can expect. As a local authority employee, her pension will be based on the number of years service she completes and her final salary at retirement. If she works for 40 years (the maximum achievable) she will receive half her final salary as pension. She will also receive a lump sum worth 3/80ths of her earnings for each year of service. So, again, 40 years service means 120/80ths, or 1.5 times final salary as a tax-free lump sum in addition to her pension.

If Sally worked to 65, she would have 32 years service. But she wishes to retire before age 60 and pays Additional Voluntary Contributions (AVCs) via Equitable Life to the Local Authority scheme, to boost pension provision. The pension that can be achieved depends upon investment performance and annuity rates at retirement. Crucially this will not enable Sally to retire early. Benefits can only be taken at the same time as her main scheme, which is normally 65. The earliest she could retire is 60 and provided 25 years service has been completed benefits will be penalty free.

This is one instance where a Free Standing Additional Voluntary Contribution scheme (FSAVC) can also be recommended in addition to her in house AVC. As the name suggests they are separate from the employers scheme and are mainly provided by insurance companies.

Provided Sally leaves service, she can take benefits from age 50. Contributions are subject to an overall limit of 15 per cent of salary and while premiums attract tax relief benefits may be taxable. The income provided will be a small proportion of her pension at normal retirement, but coupled with the shortened term on the new mortgage may give her the option she requires. Saving for retirement via an ISA should also be considered. All proceeds will be tax-free and can be used to provide a tax-efficient income.

As our couple has such a large amount of disposable income to invest normally, PEPs and Tessas would be an obvious choice. However, with their situation in a state of flux, a high interest account could best suit their present circumstances. Sally should also switch her building society monies to an account with Safeways, currently paying 7.55 per cent gross.