Wealth Check: Couple should build up pensions rather than invest in buy-to-let

Helen and Finton Wyatt want to move house but keep their present property to earn rental income. Our advisers have their say...

The patient

Helen Wyatt is keen to clear her debts so she and her family can eventually move to a bigger house, while keeping their current home on a buy-to-let basis.

The 32-year-old lives in a two-bed, semi-detached house in Exeter, Devon, with her husband, Finton, 37, and their two girls, Matilda, six, and Maya-Rose, three.

Helen works as a senior social care customer relations officer for local government, and earns around £27,000. Finton is a chef manager and earns about £21,000.

The couple bought their home in 2003 for £80,000. They remortgaged in 2006, and have around £88,000 outstanding on their mortgage on a variable rate of 1.5 per cent.

"We want to move to a bigger house and be able to keep our current home and rent it out," says Helen. "This would then become part of our pension planning."

One of the big issues holding the couple back is their debts.

"We recently took out a credit card with Virgin Money to pay off a costly overdraft," says Helen. "We now owe £3,640 on this card, but this is interest-free for 26 months. We also owe £1,240 on an Argos card, but this comes with an interest-free period on purchases. We are contemplating moving this debt to the Virgin card, but this would mean paying a balance transfer fee of 2.99 per cent."

In addition, Helen and Finton have around £3,800 left to pay on a loan with Beneficial Finance at a rate of 18 per cent. They currently pay this off in monthly instalments of £212.

"I also have a family loan of around £2,500," says Helen. "I don't pay interest on this, but am keen to pay it off soon as possible. In the short-term, we want to focus on clearing all of our non-mortgage debts.

"We have a few hundred pounds squirrelled away, but have just had car troubles, so this has left our pot even more depleted," says Helen. "As we have very little put by, we are very keen to build a nest egg."

Helen has a pension with her employer and pays in 6 per cent each month; Finton does not have a pension at present. In terms of protection, the couple have fixed-term life insurance with Legal & General including critical-illness cover. They pay £11.50 a month for this plan which covers them both.

The cure

Our panel of independent financial advisers agree that Helen is right to prioritise clearing her non-mortgage debts, but urge her to start building her savings again as soon as she can. They suggest she thinks carefully before taking on a second mortgage given her financial situation, and that both she and Finton increase their retirement pots with pension saving rather than relying on buy-to-let as this may be risky.

Clear debts

Patrick Connolly from Chase de Vere urges Helen to find out if she will incur any penalties by repaying her loan with Beneficial Finance early.

"If not, this should be her priority, as she is paying a high rate of interest," he says. "She should then focus on repaying her debts, beginning with debts where she is paying interest."

Tom Dean from Plutus Wealth Management suggests that if Helen doesn't anticipate paying off the Argos card beyond the interest-free deal on purchases, she may be better off transferring this to the Virgin card and incurring an initial charge.

However, Lorreine Kennedy from Carematters adds that while 0 per cent credit cards can represent great value, customers need real discipline to ensure the debt remains manageable.

"This means more than simply make the minimum repayments," she says.

Build up cash savings

Once Helen has repaid her non-mortgage debt, her next priority should be building up cash savings.

"Helen needs an 'emergency fund' for unexpected scenarios," says Mr Dean.

This is a view shared by Ms Kennedy. "I'd always recommend having at least three months' income set aside," she says. "Failure to build an emergency fund will simply cause Helen to borrow on cards or overdrafts, and debts will continue to grow."

Our advisers agree the couple should ideally look to hold this money in a cash individual savings account (Isa), as all the interest earned is tax-free; the annual cash Isa allowance this tax year is £5,760 per person.

To help ease the family finances, Mr Connolly suggests the couple could also make use of a site such as TopCashBack to earn cashback when making purchases.

Think carefully about owning two properties

Helen needs to think carefully about her plans to buy a bigger house and keep the current property as a buy-to-let.

"This may not be the most sensible course of action at this time, as she has quite a lot of other debts and no cash savings, so isn't really in the best position to start looking to buy another place," says Mr Connolly. "Even when she has paid off her existing debt and built up some cash savings, she still needs to consider the implications of buying another large property."

Ms Kennedy adds that while most lenders will allow borrowers to rent out their existing property, they will face a rate of interest which could be much higher on a buy-to-let deal.

"In addition, the couple will also have to find a sizeable deposit to be offered decent mortgage terms," she says. "They will also have to pay costs such as stamp duty and legal fees."

Our advisers warn that buy-to-let can be high risk, especially if there are periods when the place is not let.

Mr Dean recommends Helen get an estimate of the level of rental income she could expect from her current property, and then go through the figures carefully, to work out the amount of equity she could withdraw to put towards the new home, and what her new monthly outgoings would be.

"I'd also urge caution when considering using a buy-to-let for retirement saving, as this will not be as tax-efficient as saving into a pension," he adds.

Continue pension saving

As Helen is a member of the Local Government Pension Scheme, this will provide excellent benefits and guarantees which are difficult to meet in the private sector, according to Mr Connolly.

"This scheme also provides a spouse's pension for her husband if she dies first," he says.

While there are changes planned to this scheme from 2014 which will reduce some benefits, the pension will still have significant advantages which will be difficult to match elsewhere.

Once she is in a better position financially, Mr Connolly recommends Helen look to make additional contributions to increase her benefits.

Mr Dean also urges Finton to check whether his employer offers a company pension scheme.

"If it doesn't now, then it will soon have to do so as new legislation – known as auto-enrolment – is being rolled out," he says. "This will mean Finton's employer will be required to contribute to a pension scheme. Finton should ask about this."

Review protection policies

With two young children and mortgage debt, Helen and Finton have been sensible in getting life assurance in place, but should check they have adequate cover, says Mr Dean.

"The couple should also check what protection cover is provided by their respective employers," says Ms Kennedy. "Helen's local government benefit is generous and provides life cover.

"However, Finton has no such security, and should take out additional life cover and also income protection. Income protection can be even more important than life cover as it provides income when off work due to sickness after the employer's sick-pay scheme finishes."

If Helen and Finton have not reviewed their wills since their children were born, they should do this now.

"This will ensure their children's welfare is protected as much as possible were either partner to die," says Mr Connolly.