Wealth Check: Can we repay debts and save for old age?

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The Independent Online

Both Mel and Svetlana have company pensions and Mel has opted out of Serps. They have £20,000 in savings and pay £150 a month into a fund for Andrew. They also put £50 a month into a Scottish Widows with-profits saving plan. The couple have debts of £25,000 which they are keen to clear - they'd also like to know whether they are saving enough for the future.

We asked three independent financial advisers to help: Anna Bowes of Chase de Vere, John Stewart of PMI IFAs, and Tim Sutcliffe of PI Financial Dixon Sutcliffe.

Case Notes

Mel and Svetlana Yates, Gloucestershire

Monthly income: £35,000 (Mel) and £13,500.

Savings: £20,000 plus £150 paid monthly into fund for young son. Also, £50 a month into Scottish Widows with-profits plan.

Debt: £25,000 on credit cards and loans.

Pension: Members of company pension schemes.

Property: Own three properties. Have remortgaged their home, and two other properties are rented out.

Property

Bowes says the property market can be volatile. She would urge Mel and Svetlana to consider a wider spread of savings and investments. Stewart makes a similar point. He says the UK property market is slowing down. He agrees that the Yateses are over-reliant on one asset class for savings and is concerned they could run into trouble before retirement.

The problem is that with only £70 spare each month after paying the mortgages, Mel and Svetlana are vulnerable - if they lost a tenant, needed to make repairs, or interest rates rose, they could be out of pocket.

Sutcliffe adds that, currently, the average yield for residential property is about 6.9 per cent, which is not as high as it has been in the past. Even a rise in interest rates could wipe out the minimal surplus received from rental income.

Debts

Bowes points out that there are currently many credit cards available offering a period of 0 per cent interest on balance transfers. By switching to cards like these, the couple can continue to pay off the same amount each month, but all the repayment will be reducing capital rather than paying off interest.

Most cards have now introduced a charge to transfer money to them but, compared with the interest saved, it is still worth considering. She suggests chopping up the new card, to discourage further spending.

Bowes also thinks £20,000 in savings is rather a lot to hold in cash unless they have any specific short-term requirements with this money. It's probable that they are earning less interest on the money than they are paying on their debts. If so, they should think about paying off some of the debt.

Sutcliffe says it may be possible to reduce the Yateses' debts when they are next able to remortgage - they may wish to consider consolidating some or all of their debts with the home loan at this stage. He adds that it might be prudent to redirect Andrew's savings towards the debts for now, particularly on the with-profits investment where returns are currently low.

Pension

Sutcliffe says the couple's corporate pensions should be their foundation for retirement. There are several advantages in using pension plans to save for retirement. Contributions receive tax relief, the plan will grow tax-free, and, on retirement, 25 per cent of the fund can be taken as a tax-free lump sum. What's left then provides the income.

Stewart highlights pensions simplification reforms due next April - savers will then have a wider range of investment choices, including residential property. The couple could sell one of their properties to a private pension plan in their names - profits could then eventually be shielded from capital gains tax.

Bowes suggests that Mel and Svetlana keep an eye on the level of contributions they are making. They may be able to contribute more through additional voluntary contributions to their company schemes. Or Svetlana could open a separate stakeholder pension.

Serps has been replaced by the State Second Pension and most providers have guidelines that advise people to contract back in. Mel should contact his pension provider to see what it suggests.

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