Wealth Check: 'How can we save to build an extension?'

Each week we give 'Independent on Sunday' readers a financial makeover

The problem

With two young children, space is at a premium for Jill and Chris Heath in their three-bedroom family home in Oxford. "We'd love to be able to afford to build an upstairs extension but the cost is very high - about £15,000 to £20,000," says Jill.

With this in mind, the Heaths wonder if their savings could generate better returns elsewhere. They have built up £8,000 in Abbey's postal mini cash individual savings account (ISA), which pays 5.1 per cent interest.

They also have several hundred pounds in an Abbey online savings account, in case of emergency. They earn 4.85 per cent interest on this money.

The couple have no other investments after recently selling some Friends Provident shares because they were disillusioned with their performance.

Their home is their chief financial asset and the surge in its value - to £270,000 in the past couple of years - could prompt a remortgage. They have a two-year fix, which runs out in 10 months, with Alliance & Leicester. They pay 3.59 per cent on their £86,000 repayment deal.

They have life insurance to cover the property and have also taken out extra protection for their children.

Both Chris and Jill have been paying 5 to 10 per cent of their salaries into public sector final salary pension schemes for nearly 20 years. "Chris would love to retire early and has been told by Oxford City Council he can increase his contributions," Jill adds. "But he is not sure if this is the best option."

The Heaths don't have credit cards or personal loans and are never overdrawn. "We've always made a point of only buying what we can afford," says Jill.

Interview by Sam Dunn

The patients

Jill Heath, 38, a staff nurse, and husband Chris, 45, a landscape gardener for the local council. They live in Headington, Oxford, and have two children: George, 10, and Victoria, four. Total income: £35,000. Savings: £8,000 in a cash ISA. Goal: to save for an extension and early retirement for Chris.

The cure

To achieve their goals, the Heaths need to move the goalposts, says Martin Bamford of independent financial adviser (IFA) Informed Choice. "At their current rate of savings, it could take up to 10 years to realise their dream of an upstairs extension." Releasing some equity by remortgaging could speed things up.

Lack of investment is also a concern, says Darius McDermott of IFA Chelsea Financial Services.

In the long term, an equity ISA could boost Chris's retirement income.

Savings

Abbey's postal ISA pays one of the better rates of interest, so Mr McDermott suggests the couple leave their funds intact. However, they should build up their emergency savings to £2,500.

Lambeth building society offers a better return, says Mr Bamford. But while it pays 5.4 per cent, this includes a 0.5 per cent bonus that lasts only six months, after which the rate is far less attractive. And if you need cash in a hurry, you'll lose 45 days' interest.

Investments

Kevin Tooze of IFA Equal Partners is worried by the couple's lack of equity investments. He advises they switch their monthly contributions from Abbey's cash ISA to a stocks and shares ISA such as Jupiter Income or Invesco Perpetual High Income.

But Mr McDermott says the couple should stick with the cash ISA and start investing in equity ISAs beside it. He suggests an online fund supermarket portfolio, inside one ISA wrapper, which spreads the risk by investing in a number of different funds, such as Rathbone Income and Liontrust First Income.

Property

Remortgaging is the best way to fulfil the Heaths' plans of building an extension, says Mr McDermott. When their current deal ends in 10 months, the couple could borrow an extra £15,000 to £20,000 and, even with higher monthly repayments, still get a competitive fixed rate, says Mr Tooze.

But Mr McDermott warns the rate could be much higher than on their current deal since the base rate is likely to have risen again by then.

Given the equity in their home, they could consider moving instead of paying for an extension, since it may be "no more disruptive or lengthy and could just coincide with a downturn in [house] prices," adds Mr Tooze.

Retirement

Jill's final salary scheme is given the thumbs-up by our IFAs, while Chris is advised to ask his employer about the expected loss of retirement income if he stops work early.

"As a rule of thumb, [income] is likely to fall by 4 to 6 per cent for each year he chooses to retire before the scheme's official pension age," warns Mr Bamford.

He suggests that Chris take out a stakeholder pension to make extra payments. Since he earns less than £30,000 a year, he can put up to £2,808 in a stakeholder, even though he has an occupational scheme.

Alternatively, "buying" extra years in a final salary scheme in advance could be a sound choice because, in the event of Chris's death in retirement, half his pension would be paid out annually to his wife, says Mr Tooze. "If he does this now, it will be more cost effective than leaving matters until he is over 50."

Protection

The Heaths should find out what their respective employers would provide financially if they suffered a serious illness, says Mr Bamford. Both the hospital and local authority should offer some form of critical illness protection, says Mr Tooze.

If this seems inadequate, they could consider taking out an income protection policy.

If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email m.bien@independent.co.uk