Wealth Check: 'Should my pension or nest-egg take priority?'

Sally Morris works as a middle manager in the NHS and lives in Hertfordshire. She wants to know if she should increase her pension contributions or prioritise her savings.

Sally Morris works as a middle manager in the NHS and lives in Hertfordshire. She wants to know if she should increase her pension contributions or prioritise her savings.

Ms Morris rents out her property and although she lives with her partner in a mortgage-free home, the endowment policy on the letting is not expected to pay off the mortgage.

Ms Morris wants to know if she should change the endowment to a repayment mortgage. She would also consider increasing her monthly payments using savings or rental income to pay off the mortgage early. The couple would like a second home abroad, which can also be rented - they are considering Spain, France and Portugal.

SALLY MORRIS, 40, MIDDLE MANAGER IN NHS

Salary: £33,000

Debt: Mortgage.

Property: 25-year endowment mortgage (13 years remaining) of £40,000 on a rented property now worth about £90,000. Predicted shortfall on the endowment.

Savings: Standard Life Homeplan Endowment, Bradford and Bingley Fixed-rate Isa. National Savings Isa, Bradford and Bingley ToIsa, Liverpool Victoria investment bond, NDF Higher Income and Growth Plan; Scottish Friendly bond.

Pension: 16 years in NHS.

We put her case to Kevin Anderson of Budge and Company, David Brunning at Brunning Newman Houghton and Nick Breton at The MarketPlace.

PENSION

Ms Morris is in a strong position as a member of the NHS pension scheme, which is based on final salary and, as a public sector scheme, is very unlikely to fail.

She has a number of options to boost her pension, including buying extra "years" in the NHS scheme, joining the Health Service's additional voluntary contributions (AVC) programme or taking out a free-standing AVC from a private pension company.

Given her strong position, Mr Anderson suggests that Ms Morris waits until 2006, when the Government will introduce new pension rules, before committing more to her retirement plan. Mr Brunning says that if she does want to top up her pension, added years in the NHS scheme is the best option.

Mr Breton says that paying more into a pension, assuming Ms Morris can afford to do so, will be her best option because tax relief is upfront.

SAVINGS AND INVESTMENTS

David Brunning points out that Ms Morris's savings and investments are focused on cash and investments that generate income rather than capital growth. She is paying income tax on the proceeds, but not using her annual capital gains tax allowance, currently £8,200. If Ms Morris becomes a higher-rate taxpayer, this will strengthen the case for her to look again at her savings.

Mr Anderson suggests Ms Morris could raise her exposure to equities, by making a regular payment into a unit trust, Oeic or investment trust. He adds that if she is maximising contributions to a cash Isa, a stocks and share Isa should be next, in order to protect as much of her money as she can from tax.

Mr Brunning cautions that Ms Morris's NDF Higher Income & Growth Plan investment, is a "precipice bond". She should ask the company for a projection of its value, as they have not performed well recently.

MORTGAGE AND ENDOWMENT POLICY

Ms Morris should consider looking for a better mortgage deal, even though she now lets her property, Mr Brunning suggests.

Working out the endowment shortfall is harder. Her insurer's estimates are based on a return of 6 per cent, but Mr Brunning believes this is optimistic: Standard Life has announced a bonus rate of around 2.5 per cent from February this year.

The panel agrees that the most sensible option is for Ms Morris to switch her loan to a repayment mortgage; Mr Anderson suggests that if she can pay off the mortgage early, she should do that too. But she should keep her endowment policy going as a form of saving, as it "remains an excellent long-term investment", according to Mr Brunning. She might also be eligible for a windfall, should Standard Life demutualise.

Mr Breton says that, as Ms Morris has quite a small mortgage and little time left to run, switching to a repayment loan might be her best option. But she should take professional advice.

OVERSEAS PROPERTY

Mr Breton recommends she has the mortgage in the same currency as the property. Taking out a euro mortgage minimises risks. But relatively few UK lenders offer euro mortgages; those that do want a deposit of 25 to 30 per cent of the purchase price. Buying expenses are also usually higher in continental Europe.

An alternative is to release equity on a UK property. This is an option for Ms Morris as her main home is mortgage free. She should seek professional advice as early as possible.

* If you would like a financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk