Save now or pay the price later

Trisha Cochrane is 35 and a freelance occupational psychologist. She is in her third year of self-employment, having earned pounds 25,000 before tax in year one, just pounds 12,000 in year two, but pounds 14,000 to date in the first half of her third year.

She lives in west London with her partner, who works full-time. She pays pounds 200 a month on her mortgage, which is for pounds 30,000, and also has around pounds 90,000 of equity in her home. She has an endowment policy - presently worth pounds 12,000 - to cover the home loan. Trisha also puts pounds 450 a month into a joint account for bills, house improvements, going out and the like.

Trisha has pounds 7,000 in PEPs, another pounds 1,500 in Norwich Union shares, and pounds 2,000 in premium bonds. She also tries to put pounds 100 a month into a postal account with Buckinghamshire building society, although in practice this seems to get spent.

Trisha has never been in a company pension scheme, but while she was working full-time she started a personal pension, which also included contracting out of the earnings-related state pension (Serps). Contributions into this have been variable and total around pounds 11,000 to date, and at present she is saving pounds 175 (including tax relief) a month.

Trisha is concerned about whether she is saving enough for her pension and making the most of her savings.

What a financial adviser recommends:

Trisha does need to think about saving more for her pension. Based on what she has put into her personal pension so far and even assuming she continues saving at the present rate of pounds 175 a month for the next 25 years, she could be due a pension of just pounds 4,200 (state pension aside and with annual increases of 5 per cent built in). If growth is higher, say 9 per cent a year, the pension could be around pounds 10,500 a year. But even assuming the higher figure, this does not take into account how inflation will have eaten away at the spending power of that money by the time Trisha retires aged 60.

To get a better idea of the likely shortfall, Trisha should ask each of her three pension companies - Scottish Provident, Scottish Widows and Scottish Amicable - as well as the DSS (for the state pension), for forecasts of the different pensions she will be due at retirement.

Scottish Amicable is in the process of being taken over by Prudential and Trisha will be due a windfall in October. The other two insurers may yet be taken over or convert into companies quoted on the stock market. Trisha should check whether she is in the with-profits funds of these insurers or, if not, consider putting at least some money in those fund options. By being in these funds she will maximise her chance of benefiting from any windfalls.

With the three companies she should also check she has "waiver of premium" cover. This will ensure her contributions continue to be paid should she be unable to work through ill health.

The pension plans she has are good ones in that they allow her to stop, increase or decrease contributions or retire early without penalty. But, realistically, getting a decent retirement income from them will depend on her ability and willingness to save more.

She should consider cashing in her premium bonds and switching to a building society. Premium bonds are most attractive to higher-rate taxpayers because prizes are tax-free. The money should be put in a postal account, preferably of a building society that might yet produce a windfall. It could also be used to pay Trisha's approaching tax bill.

Trisha has a James Capel PEP which allows her to choose her own investments - a "self-select" plan - but she is not interested in choosing her own shares and believes the stock market is at a dangerously high level. She should consider switching to a PEP that offers some downside protection. Plans offered by Scottish Widows and Govett both offer growth but lock in gains as they go along.

Similarly, she might consider swapping her Norwich Union shares for a unit trust PEP holding or otherwise switch them into a PEP - if she wants to keep them.

q Trisha Cochrane was talking to Paul Grant, director of Master Adviser, which is based in central London and is a member of Financial Options Group, a network of independent financial advisers.

If you would like to be considered for a financial makeover for publication, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL. Fax: 0171-293 2096 or 2098; e-mail: Please include details of your current financial situation, a daytime telephone number, and state why you think you need a makeover.

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