Wealth Check: Catering for a desire to travel and visit family

A divorced mother wants to take time out to visit her children in Australia and travel the UK ? but she is worried about her pension
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Gill English's family is a long way from home. Her children moved to Australia a few years ago. "My daughter, Sarah, met a boy there on her gap year before university," she says. "And Chris, my son, went because he wanted a fresh start."

Gill English's family is a long way from home. Her children moved to Australia a few years ago. "My daughter, Sarah, met a boy there on her gap year before university," she says. "And Chris, my son, went because he wanted a fresh start."

Ms English visited them two years ago and is going again this summer. The 51-year-old will use her entire 20 days of annual leave on the trip.

Ms English has worked for a catering company which serves the National Grid, near Reading, for three years. Before that she was a social worker with Surrey Local Authority.

She does extra work in her spare time, which gives her an additional £4,000 a year.

Her main financial worry is her pension. "There are large gaps when I've either not been earning or not paying into a pension fund." She was in a local authority scheme for 13 years but is unsure how much income this will produce when she retires. She did not expect to remain in her present job for long, and has not joined its scheme. "I don't have many more pension-paying years and the options now are confusing. I expect, though, that I'll have to work until I'm 65."

Ms English lives in a 3-bedroom end-of-terrace house in Bracknell, Berkshire, which she estimates to be worth £150,000. She has an endowment-linked mortgage due to be paid off in 2008. She wonders if she was wrongly-advised about the endowment.

Ms English is considering taking in a lodger but wonders whether it would be worth it if she were to lose her single person's reduction in council tax.

"I don't wish to extend the term or increase my payments by a considerable amount but I have a lot of equity in the house. Is there any way I can release some to buy another car?" she asks. She has a 10 year old Vauxhall Astra. She feels she cannot manage without a car.

Ms English is also worried about illness. "I no longer get sick pay and if I had extensive time off work I would be in trouble. Can I afford to pay into a health insurance scheme?"

At some point she anticipates letting her house to go to Australia for about six months. She also hopes to take six months off to travel the UK.

We put her case to Anna Bowes, savings and investments manager at Chase de Vere in Bath, David Bitner, head of product operations at The MarketPlace in London, Ashley Clark, director of Need An Adviser.com in Staffordshire, and Ben Yearsley of Hargreaves Lansdown in Bristol.

Gill English - hospitality worker

Age: 51

Status: divorced; two children, Sarah (25) and Christopher (28); one granddaughter, Maya (3)

Occupation: hospitality and catering worker for the National Grid in Reading

Salary: £14,000 from National Grid job; £4,000 from agency work

Education: qualified social worker

Motoring: 1992 Vauxhall Astra

Debts: none

Savings: £2,000 in Alliance and Leicester savings account

Pension: 13 years in local authority pension

Investments: none

Property: 3-bedroom house in Bracknell, Berkshire, worth about £150,000

Outgoings: (per month) phone £30, electricity £17, gas £25, council tax £58, food £100, mortgage £200, mortgage endowment £52, entertainment £40, car insurance £24.50, petrol £40

Solution 1: Pension

Mr Clark estimates Ms English has accrued a pension of 13/80ths of her final salary at the date of leaving social services, and a tax-free cash lump sum of 39/80ths. As she has worked on and off over the years, she may not have paid enough National Insurance to accrue a full basic state pension. She should obtain a State Pension Forecast from the Department for Work and Pensions by completing a BR19 Form. It is a free forecast and will give her a good idea of the state pension she is likely to receive. Combining her state and company pension forecasts will give her better idea of her pension shortfall.

Mr Yearsley says that since Ms English is not paying into a pension, it would be wise for her to pay into a stakeholder scheme. Standard Life Managed fund is a good choice.

Solution 2: Mortgage

Mr Bitner says Ms English should contact her lender and find out whether her endowment-linked mortgage is on target to pay off her mortgage in 2008. This is the only way she will know if her current monthly payments are sufficient, or whether she needs to make adjustments.

Ms Bowes says Ms English should consider taking out a short-term repayment mortgage to raise money for a new car. This will be considerably cheaper than a personal loan, but she must remember that if she fails to repay the money or defaults, her home is liable for repossession by the mortgage lender.

Mr Clark suggests that a way to release equity for a car of say £5,000, Ms English should re-mortgage on a part repayment/part interest-only basis to cover any potential endowment shortfall plus the additional borrowing. This would cost an extra £92 per month on a 4 per cent mortgage rate over 5 years and a little more to cover any endowment shortfall.

Solution 3: Renting a room

Mr Yearsley says an Inland Revenue scheme called "Rent-a-Room" allows you to rent a room in your house and get tax-free income from it, up to a certain amount. You can receive up to £4,250 per tax year and you don't have to pay tax or declare it. If the amount you receive in rent is more than the £4,250, you would have to declare it and potentially pay tax on it. This would affect Ms English's single persons' allowance for council tax. It would be worth working out how much extra her council tax bill would be, plus her additional expenses (such as increased gas and electricity bills), then deciding how much she wants to charge for the room, and whether it is worth the inconvenience.

Mr Clark says she should be careful because most lenders will allow up to two years renting out. After that she may be charged commercial interest rates or get a capital gains tax bill if she rented permanently and then sold the property.

Solution 4: Health insurance

Ms Bowes says Ms English should ask her employer what arrangements they have if she falls ill. They will probably have a scheme whereby she is covered for the first six months on full salary and then half salary thereafter. If this is the case, she needs only a policy to top up this cover after six months.

Alternatively, as part of a flexible benefits package, her employer may be able to increase cover after six months. She won't be covered for her supplementary income from her other job, so she may want to consider covering this income too, but she will need consistency in her earnings because an insurer will want to see evidence of earnings.

Mr Clark says permanent health insurance is expensive for a 51-year-old female. But a Swiss Life package providing a monthly benefit of £437 which would start paying out after one month of being off work sick and continue paying benefits until age 60 if necessary would cost £43.95 a month. Alternatively, she could consider a cheaper accident, sickness and unemployment plan which would pay out for only 12 months to cover her mortgage payments until she got back on her feet. For £11.21 a month with Paymentshield they provide cover of £252 per month with the three first three months' premiums free.

If you would like to be given a financial health check-up, write to: Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.

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