Wealth Check: 'Do I pay off my mortgage or beef up my pension?'

Chemist wants to retire early but move up the property ladder while providing for his daughters' education. What does the future hold?
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The Independent Online

Clive Mowforth is looking forward to retirement, although he is only 46. "I had hoped to retire in 10 years but that doesn't look likely," he says. "I don't want to work past 60. My greatest concern is having sufficient resources to draw on when I retire."

He has been a research chemist for British Energy for 15 years. "It's desk-work," he says. After a DPhil in chemistry at Oxford he worked in the photography industry for five years and joined British Energy in 1988. Mr Mowforth has been contributing to the company's final-salary scheme at £200 a month, plus £300 added years and £100 in additional voluntary contributions.

He lives with his wife Mary, 47 and daughters Barbara, 17, and Claire, 18, in a three-bedroom house at Dursley, Gloucestershire, on the edge of the Cotswolds. Mrs Mowforth is thinking about working in a plant nursery when her husband retires. Barbara has finished college and is looking for a job and Claire has completed her first year at university. "We contribute to Claire's living expenses and university fees," Mr Mowforth says.

Their house is worth £150,000 and they have a £36,000 endowment mortgage with Cheltenham and Gloucester, to be paid off in five years. "For the past 10 years, I have ploughed as much money as possible into my pension but have not moved house for 15 years," Mr Mowforth says. "I wonder whether the tax-free lump sum on retirement will be sufficient if I want to move to a more expensive house?"

He is considering three options. "I could continue paying £600 a month into my pension and invest the lump sum on retirement in a home; I could switch some funding to my mortgage - either from my pension or by cutting back on expenditure - and to move up the property ladder now so that shock is not so great later. Or I could buy a second home and rent it out until I retire."

Mr Mowforth, a keen walker and occasional mountaineer, would consider moving to the North where houses are cheaper. He has 1,000 shares in British Energy, worth 4p each and pays £15 per month into life term assurance and £13 in accident cover.

We put his case to Darryll Connor, of Towry Law, Elliot Nathan, senior technical underwriter for The MarketPlace, Juliet Schooling, head of research at Chelsea Financial Services and Philippa Gee, investments director of Torquil Clark.

Clive Mowforth, 46 research chemist

Family: Married to Mary, 47; two daughters, Barbara, 17 and Claire, 18;

Occupation: Research chemist for British Energy

Education: BSc in chemistry from Exeter; DPhil from Oxford;

Car: None;

Debts: £36,000 mortgage to be paid off in five years; £2,000 on Egg and Abbey National credit cards;

Salary: £48,867

Savings: None

Pension: 15 per cent of salary into company final-salary scheme (Per month: basic £200, plus £300 for added years, plus £100 AVC);

Shares: 1,000 British Energy, valued at 5p each;

Property: Three-bedroom house in Dursley, Gloucestershire;

Outgoings (per month): Mortgage (including house and contents insurance) £217; mortgage payment protection £18; endowment £89; gas £33; electricity £20; pet insurance £14; charities £10; Sky £26; council tax £109; water rates £26; subscriptions to £30; food, clothing, household items £900; transport £110; credit card £900; life term assurance £15.

Solution 1: Savings

Ms Schooling recommends Mr Mowforth reduce his credit card debt. He should transfer the balance to one offering 0 per cent interest, such as First Direct. Mr Nathan says Mr Mowforth needs to have cash in an instant access account for emergencies. He recommends having two to three months' expenditure on instant access.

Ms Gee is concerned by Mr Mowforth's dependence on pension funds. He should consider a mini-cash Isa, which can take monthly investments if required. They are tax-free and would give the access he requires. She suggests the Safeway account, which pays a variable 4.2 per cent or Northern Rock, which offers 4.35 per cent. The maximum any adult can put in a cash Isa in a tax year is £3,000. If he wishes to invest more, the Telephone Plus account from Birmingham Midshires offers instant access, with a variable 4.15 per cent on balances of £1,000 or more.

Solution 2: Pension

Mr Nathan says judging from the sums Mr Mowforth is putting toward his pension, he should be able to live comfortably from his pension pot. But he needs to constantly check his pensions arrangements because many final-salary schemes are closing and he needs to know what the worst-case scenario for his pension could be by the time he retires.

Mr Connor says Mr Mowforth, a higher rate taxpayer, will attract 40 per cent tax relief on all pension contributions, but the ultimate benefit will be based on his age and salary at retirement. If he wants to make further pension provision he can invest up to £3,600 per year gross into a stakeholder one for his wife. Non-taxpayers get relief at 22 per cent, and having a pension in your own right is often important for a spouse, especially as the widow's income from a company scheme can be low.

Ms Gee says if he intends to retire within 15 years, he needs to be clear about how realistic his pension funding is. He should request an up-to-date statement of potential benefits. He should also complete a form called BR19 which will provide him with an idea of the level of potential state pension he might receive.

Solution 3: Mortgage

Ms Schooling says although Mr Mowforth should consider remortgaging. The Britannia Building Society are offering a two-year fixed rate at 3.34 per cent. Mr Nathan says Mr Mowforth's mortgage payments, including his buildings and contents insurance, total £217 a month. He can easily reduce these payments by moving to one of the present market-leading deals.

Solution 4: Retirement home

Mr Nathan says it seems Mr Mowforth's endowment is on track to cover the £36,000 and will give him an extra £14,000. But he should constantly check this, as it still has a few years to run and could deteriorate. Assuming the endowment matures when the present mortgage finishes in five years, he could use this extra money to help pay for moving to a more expensive property.

Mr Mowforth could cut down on the amount he pays into his pension, pay the mortgage off and keep the pension lump sum. He would then be able to retire at 60 with no mortgage. He could also consider buying a home to retire in now and renting that out until he and his wife are ready. He would benefit from any property price growth twice over, owning two different properties.

Ms Schooling says if Mr Mowforth moves up the property ladder now, and moves again on retirement he would double the associated expenses such as solicitors' fees, stamp duty etc.

Mr Connor says being a landlord, especially at a distance can be difficult, and you are not guaranteed that you will always have tenants. Rental properties have proved excellent investments, but whether this will continue is anybody's guess. The RICS residential letting survey in April showed the gross yield on rental property was 5.3 per cent, which should cover any mortgage. But he could be storing up capital gains tax problems depending on which property is elected as the principle private residence.

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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