Help me out of this trap

Adviser Bryan Fisher considers a reader's double-edged problem
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The Independent Online
Q: In the light of current press speculation over plans to run down the state earnings related pension scheme (Serps) I began considering my own position.

My problem is twofold - negative equity and inadequate pension provision. At 41 I am anxious to get my financial situation sorted. The pension I currently have has been in place for four years, I contribute pounds 50 per month to it and I have contracted out of Serps.

In addition, my flat has negative equity of around pounds l7,000. I have a personal loan taken out to cover the cost of recent refurbishment and now on top of this the freeholder has advised that all tenants must pay around pounds 3,000 to cover the cost of general maintenance.

My flat is currently valued at around pounds 39,000. I am concerned that the flat won't appreciate sufficiently to justify me hanging on to it, but I am trapped. I cannot see a way out given my negative equity, current and projected outgoings and inadequate pension provision. Can you help? J B, London

A: I believe you have every reason to be concerned about the future of Serps. In principle it was a good idea. However, because of escalating costs it is unlikely to be sustained for ever.

You have contracted out of Serps which, I assume from the information given, was four years ago when you took out the personal pension, which appears to be the right decision. Contracting out is not a once in a lifetime decision, however. As with most financial planning matters it will require reviewing regularly.

Now is the best time to increase your pension contributions. With 19 years to go until your 60th birthday the compound growth on your early contributions will be far more valuable than the growth can possibly be on the last few years' premiums. It is therefore essential that you attempt to maximise the level of your investment as soon as you can. Whether this investment is into your existing plan or another is impossible to advise on without analysing the particulars of your present policy.

At the age of 41 you are allowed to contribute 20 per cent of your income into a Personal Pension Plan and receive tax relief at your highest rate payable. For example, on a salary of pounds 25,000 per annum your maximum gross investment would be pounds 5,000 per annum or pounds 4l6.66 monthly. As an employee you will receive basic rate tax relief and the "net cost" to you would be pounds 316.66, in the current tax year. Your current investment of pounds 50 per month equates to an investment of just 2.4 per cent of your salary which, even with strong investment performance, is unlikely to provide you with the level of retirement income you would want.

On the property front I do not think you should be too concerned about the negative equity in your flat. Property prices are rising faster than at any time since the peak of 1989, with London and the South-east leading the way.

I would be concerned by the "general maintenance" bill you are likely to receive. You do not mention what advice you have already taken on this, but I would strongly suggest before parting with any money that the tenants collectively seek legal advice.

You may wish to consider the possibility of switching your existing interest- only mortgage to a repayment one. This will then mean that part of your monthly payment pays off capital which will have the effect of reducing your negative equity with every payment you make. The only problem may be whether the building society will allow this. Currently they will have a legal charge on the property and the endowment policy you have.

You will need to obtain a surrender value for your endowment from the insurance company. As you have negative equity the building society may wish to reduce the outstanding balance with this surrender money. Therefore you will need to ask the Building Society first of all whether this switch is possible and secondly check the monthly cost to make sure the repayments are not excessively expensive. This will depend on several factors such as the outstanding term of the mortgage which was not given.

Overall, according to your income/expenditure analysis you appear to have surplus funds which, if the appropriate steps are taken over the next few years, should put you into a much stronger position financially.

Bryan Fisher is an independent financial adviser and the financial planning manager at Berkeley Financial Planning in Coventry. Readers are invited to write to him c/o The Independent. Letters should not exceed 250 words. The advice is for guidance only and no action should be taken without receiving specific and professional advice.

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