Wealth Check: Equities are the key to unlocking the door for long-term savers
Vicky and Chris Dyer are aiming to pay off their mortgage quickly and then concentrate on building up funds for their retirement
Saturday 26 April 2014
Vicky Dyer, 32, and her husband Chris, 38, from Dover, Kent, would like to pay off the mortgage on the family home as soon as possible, and also want to have enough saved up so they can retire comfortably.
In addition, they hope to be able to build up a nest egg for their two children: Matt, three, and Chloe, nine months.
Vicky is a self-employed travel agent and works from home.
"My pay varies quite a lot, and I've also been on maternity leave twice in the last four years," she says. "But I currently earn around £25,000."
Chris works as a police sergeant and has been in this job for 17 years. He currently earns £41,000.
The couple are set on saving hard now they are both working again.
"I have £2,500 in a cash individual savings account (Isa) with the Halifax but the rate has dropped to just 0.25 per cent," says Vicky.
"I also have £1,500 spread across two Halifax current accounts. Chris has around £12,000 in a stocks-and-shares Isa with Interactive Investor. He also has several 10-year savings policies with the Police Mutual."
Vicky and Chris have opened accounts for both their children with the Halifax.
"There is around £3,500 in Matthew's account and £600 in Chloe's," says Vicky.
The couple bought their four-bedroom, semi-detached house in Dover in February 2007 for £214,000.
"We then spent £20,000 in the first year renovating the property," says Vicky.
"We now have £78,000 left to pay on our mortgage with First Direct. This is an offset deal at 2 per cent above the base rate."
With an offset, savings are linked to the mortgage balance, and rather than earn interest on savings, the money is set against the outstanding mortgage.
As part of their arrangement, the couple have £11,000 in savings with First Direct. Their aim is to have paid off their mortgage in full within five to eight years. Having done this, they hope to save hard so that 10 years later they can either move to a bigger house, purchase a small, buy-to-let property, or buy abroad.
As Vicky is self-employed and receives no benefits from an employer, she pays around £200 a month into a personal pension with Friends Provident. Chris pays around £450 a month into the police pension scheme.
The couple have no debts, and while they do have Tesco credit cards to benefit from Clubcard points, they pay these off in full each month. They also frequently use Quidco to benefit from cashback when making purchases.
In terms of protection, Vicky pays around £33 per month for life insurance and critical illness cover, while Chris gets additional cover through the police.
"Our main focus is on clearing the mortgage and saving for retirement," says Vicky. "But we'd also like to be able to provide our children with financial help through university - or with a house deposit when the time comes."
Our panel of independent financial advisers commend Vicky and Chris for their approach to debt and for wanting to clear their mortgage as soon as possible; they also commend them for wanting to focus on their retirement planning. However, they urge them to consider equities rather than cash when it comes to savings. They also suggest they think carefully before entering into buy-to-let or purchasing a property abroad.
Build up separate savings pots
James Robson from Plutus Wealth Management recommends the couple put in place a more-structured savings plan, using separate "pots" for different aims over various time periods.
"As a first step they should maintain an emergency fund of three months' outgoings in cash," he says. "This is especially important given Vicky's self-employed status. I would hold this in an instant-access account. The second step would then involve them holding money in the offset account with the aim of reducing the balance on the mortgage."
As a third step, he suggests having a cash-based account for medium-term savings.
"After this, the couple should set up a pot for medium to longer-term savings," he says. "This can include Chris's investment Isa and other money the couple look to invest - rather than keep it in cash."
John Ditchfield from Barchester Green Investments agrees that when it comes to longer-term saving, a stock-and-shares Isa makes more sense.
"Cash Isas only pay a very modest level of return after inflation," he says. "Equities are more volatile, but Vicky can afford to take a long-term view."
Patrick Connolly from Chase de Vere adds that as the rate paid on the savings in the offset account is higher than that on other savings accounts, it is also sensible to use this facility as part of a wider plan.
Review children's savings
Vicky and Chris are doing the right thing by starting early and putting aside regular amounts for their children.
"But as they are likely to be investing over a period of between 10 and 15 years, they may be better off in stocks and shares, rather than cash," says Mr Ditchfield.
Mr Connolly adds that one of the best ways to save for children is through junior Isas, as this type of account is more tax-efficient.
Consider property options carefully
While investing in a buy-to-let can mean a regular income from rent, Mr Connolly warns property prices can fall as well as rise.
"This will be a real danger when interest rates start to rise and the mortgage payments become more expensive," he says. "There is also the risk of the property being void for prolonged periods. The risks of buying property abroad are even greater and I would be wary of doing this."
Mr Robson also urges caution: "A buy-to-let or holiday home will require a significant deposit of around 25 per cent - plus purchasing overseas can come with many additional expenses," he warns. "Moving to a larger family home would also incur costs, and as it is likely to mean buying somewhere bigger, this would move them into a higher stamp-duty band."
Continue with pension saving
Mr Ditchfield and Mr Connolly agree that the police pension is a good-quality, scheme and Chris should maximise its benefits.
Mr Robson adds that Vicky is doing the right thing by saving into a personal pension.
Keep an eye on investments
For most people, the best approach for long-term savings is a combination of pensions and Isas.
"Chris should review his investments to ensure they are suitable for him and performing as he expects," says Mr Connolly. "He should also review the 10-year savings policies and, in particular, look at the maturity values."
These types of policy invest in with-profit funds and often have high charges.
"They can also be inflexible and perform poorly," warns Mr Connolly. "The problem is there are often punitive exit penalties. Given this, the best course of action is usually to retain them until the end of the policy."
Ensure the family is protected
With two young children, protection needs are very important, according to Mr Robson.
"While Chris's protection arrangements are linked to his employment, Vicky should assess the level of cover she has in place to check this is sufficient," he says. "As she's self-employed, she could also consider the benefits offered by income protection. In addition, both Vicky and Chris should write wills."
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