Wealth Check: 'I retire in 10 years. Is my pension plan a good one?'
Saturday 24 April 2004
Linda Dickins plans to retire in about 10 years from her job as a community psychiatric nurse, a job she trained for late in life.
Linda Dickins plans to retire in about 10 years from her job as a community psychiatric nurse, a job she trained for late in life.
She shares her home with her second husband, who is semi-retired. Ms Dickins owns a property in Sheffield, South Yorkshire, which she lets to her son, his fiancée and a lodger.
She wants to know whether she is on track for retirement and whether her pension provider is a good one. She also wants advice on capital gains tax on rental property; she would like to use the profits from it to help her children on to the property ladder.
We put her case to Danny Cox at Hargreaves Lansdown, Alick Howard at MDM Associates and Matthew Morris at Rickman Tooze.
LINDA DICKINS, 51, COMMUNITY PSYCHIATRIC NURSE
Debts: £1,280 (car loan plus credit card at 0 per cent)
Property: Home owned with husband, worth about £150,000 with mortgage of £36,000
Savings: £2,200 in cash Isa; Norwich Union endowment policy, worth between £5,000 and £9,000
Pension: NHS pension; also pays £50 a month into the National Pension Fund for Nurses.
Spending: Around £600 per month including mortgage payments
Ms Dickins's NHS pension will pay her twenty-eightieths of her final salary, assuming she works for 10 more years and stays in the scheme. This will give her a pension of about £6,000 a year.
According to Mr Howard, the National Pension Fund for Nurses was taken over by Liverpool Victoria and is now a closed fund. There is no penalty for switching out of the with-profits fund, so Mr Howard suggests Ms Dickins could think about moving, perhaps to Liverpool Victoria's main with-profit fund, a good performer.
Mr Cox suggests Ms Dickins could boost her retirement by putting more into the NHS pension scheme. She could also increase her National Insurance contributions, to bolster her state pension, by making additional (Class 3) contributions. This would cover her 10-year career break, when she was bringing up her children.
Assuming Ms Dickins will have paid off her mortgage by retirement, she is on track for a standard of living roughly comparable to her current take-home pay.
If Ms Dickins sells her second property she could be liable for capital gains tax (CGT). The exact amount, though, depends on when she sells. If she keeps the Sheffield house she will only pay 60 per cent of the tax due. Mr Howard calculates that if she is a basic rate tax payer at that time, the rate of tax will, in effect, be only 12 per cent.
Mr Morris suggests that any CGT bill may not be that large, especially given the money Ms Dickins has spent on refurbishment. However, one way to minimise the tax would be for Ms Dickins to sell the house to her son now, using her annual CGT exemption to cover any small gains. If she transfers ownership so that the house is in her and her husband's name, the CGT allowance doubles to £16,400.
Given that Ms Dickins does not make any money by renting the Sheffield house to her son - the panel point out that the rental income barely covers costs, even before refurbishment - selling the house to her son could make sense. He would not have to pay any capital gains tax should he come to sell later, because main residences are exempt. The family would, of course, have to allow for sales costs, especially stamp duty, if the house is worth more than £60,000.
ENDOWMENT POLICY AND SAVINGS
As Ms Dickins has a repayment mortgage, she will not suffer a shortfall from her endowment. This gives her a degree of flexibility in deciding what to do with the policy. Mr Cox suggests that if the endowment is with-profits, Ms Dickins should not pay anything further into it but instead divert the money into a lower cost, cheaper savings vehicle such as the cash Isa or additional voluntary contributions to her pension.
Mr Cox and Mr Howard agree that Ms Dickins should keep, not sell, the policy, because this will give her the best overall return. Mr Morris suggests that when the policy matures, the money could be used to bolster Ms Dickins's retirement income.
Mr Howard says that because Ms Dickins only has a mini cash Isa at the moment, she could increase her tax-free savings by taking out a stocks and shares Isa. A corporate bond fund might suit her better if she prefers to avoid the risks of shares.
Ms Dickins has few debts and her car loan will be paid off later this year. However, Mr Howard says that Ms Dickins should look around for another 0 per cent credit card offer when the introductory rate on her current credit card expires.
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