Wealth Check: 'How can I be free of a mortgage by the time I hit 50?'
Saturday 19 September 2009
Owen Wright, 23, is a graduate doing a PGCE teacher-training course at Oxford. He is single, and would like to be earning £30,000 in six years' time and able to own a nice house without a mortgage by the age of 50. He is worried that high unemployment will lead to fewer taxpayers and, in turn, less money available to pay teachers.
While he is currently not on a pension scheme, still being in education, he is "prepared to save a lot for retirement in order to receive at least £50 a week above the basic pension. I would like to stop paid work as early as is sensible. Hopefully 55-60," he says.
Income: bursary of £9,000 tax-free, £4,000 loan
Living expenses: £9,000
Other: £3,425 (tuition fees, plus holidays)
Expected inheritance: £16,000
Debt: £10,000 (student loan)
Advice this week is given by Chris Wicks of N Trust Group, Danny Cox, head of advice at Informed Choice, and Martin Bamford, a chartered financial planner at Informed Choice...
"While you are a student and have no income, it would be prudent to avoid incurring any additional expenses," advises Chris Wicks. Owen currently has no savings, but does keep money for emergencies. "It is important for you to keep a good tab on your expenses in order to avoid getting any further into debt than you have to."
Danny Cox suggests that Owen use his inheritance wisely once it arrives. "Owen's expected inheritance will be sufficient to repay his student loan, giving him a much better start to his working life than the typical university leaver."
Martin Bamford sees a potentially different role for the money. "A large number of people have moved from other professions into teaching, as a result of the recession, so Owen may find himself faced with tougher competition for jobs initially."
"Owen might, therefore, choose to use this inheritance to fund his living expenses whilst looking for employment when he graduates. Depending on how long this takes, he might consider temporary work to avoid depleting this inheritance or building up more debt."
Owen's goal of owning a home that is mortgage-free by the age of 50 is one that Martin Bamford thinks is certainly viable. He adds that "Owen needs a strategy for getting on the housing ladder in the first place. As a newly qualified teacher, he might consider shared ownership with other teachers as a way of being able to afford to buy a property."
Chris Wicks suggests yet another use for the inheritance money. "When you receive your inheritance, it would be sensible to retain this on deposit as you are likely to need it, for example, as a house deposit in the next couple of years. As you are not currently a taxpayer, you should complete form R85(1990)."
Danny Cox spells out what Owen's goal would look like in terms of numbers. "On the basis that he wants to be mortgage-free by the age of 50, Owen should stick to a mortgage of no more than 25 years and ensure he has an appropriate repayment plan. My preference is a repayment mortgage.
For example, if Owen bought a property with a £100,000, 25-year repayment mortgage, the monthly repayments would be £590 based on a five per cent interest rate. This increases to £651 per month if interest rates increase to six per cent. In the meantime, Owen will need to save hard to generate a deposit, and a cash ISA is an ideal – and tax-free – way to save up to £3,600 a year."
"The basic state pension is currently £95.25 per week so Owen's minimum target of £145.25 per week, or £7,500 a year is technically below the poverty line and below the £9,000-a-year he is currently spending on living expenses," says Danny Cox.
He points out that Owen will have to provide for himself until he is 65, assuming that he takes the Teachers' Pension Scheme, as that is the earliest that he can draw it. "If Owen took out a personal pension at age 25 and paid in until the age of 55, to achieve the desired income of £7,500 in today's terms, he would need to save £360 per month."
Cox, whose advice on this issue is almost directly echoed by Bamford, also counsels not ignoring the Teachers' Scheme. "The teacher's pension, being a final salary scheme, is one of the best pensions available in the UK and backed by the taxpayer."
Wicks also endorses the scheme: "The website www.teacherspensions.co.uk has a number of useful calculators. For example, if you achieve 40 years' service based on a final salary in today's terms of £30,000 you could expect a tax-free cash sum of £8,5713 and a pension of £12,858.
He adds: "You can also top up your pension by making contributions to a private pension or the additional voluntary contribution scheme that comes with the Teachers' Pension Scheme."
For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email wealthcheck@ independent.co.uk
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