Wealth Check: 'What can we do to stop worrying about the future?'

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Alison Carter and her partner, AJ Moore, have been hit by two financial problems at once: falling personal pensions, and endowment policies that are set to fall short of their mortgage.

Alison Carter and her partner, AJ Moore, have been hit by two financial problems at once: falling personal pensions, and endowment policies that are set to fall short of their mortgage.

Mr Moore has stopped paying into his two personal pensions; he had been especially concerned when Equitable Life ran into its much-publicised difficulties in recent years. Instead, the couple pay into savings accounts and Ms Carter bought a bond last year, thinking that it would be a safer alternative to pensions. They admit that they are now very nervous investors, but are unhappy with the idea of throwing away the tax breaks that pensions afford.

The couple have two sons, aged four and eight, and Ms Carter has recently returned to work, as a part-time librarian.


Salary: Alison £4,000, AJ £43,000

Property: House with offset mortgage of £67,000, 5.75 per cent.

Savings: One mini cash Isa each with First Direct, 4.35 per cent. Alison: Tessa-only Isa with Britannia, 4.75 per cent. AJ pays £350 monthly into a First Direct savings account, 3.5 per cent.

Investments: Endow-ments with Standard Life, Prudential, Eagle Star, Royal Scottish Assurance. Shortfall £5,000-£15,000.

We put their case to Ben Yearsley at Hargreaves Lansdown, Justin Modray at BestInvest, and Anna Bowes at Chase de Vere.


Ms Bowes points out that Ms Carter and Mr Moore have taken steps to address the shortfall on their endowment policies, by paying off some of the original mortgage. But as far as the endowments are concerned, they should think about either making their policies paid up or cashing them in. Possible exceptions are their policies with Standard Life and Prudential. Standard Life investors may qualify for a demutualisation windfall, and the couple should take this into account. And there are likely to be penalties for paying up or cashing in a policy. There may also be tax implications for Mr Moore, and they will need to find an alternative investment vehicle to pay off the mortgage.

Mr Yearsley suggests that the couple could look to cover the shortfall through cash savings: a further £100 a month set aside could bridge the gap. But he is unconvinced by the mortgage. Offset mortgages, he says, only work well for homeowners with a lot of cash in the offset account; the couple have most of their spare cash in Isas. This money is earning under five per cent, but they are paying 5.75 per cent on their mortgage. They could, he feels, do better with an ordinary variable-rate or fixed-rate mortgage.

Mr Modray says that although most of their savings are tax-free, they could do better if they put the money into their offset account. This would earn the equivalent of 5.75 per cent tax-free interest - or 7.9 per cent for a higher-rate taxpayer. At the least, Mr Moore should pay the £350 a month he saves with First Direct into the offset account.


Mr Yearsley says that the couple could earn more on their Isas by switching to a bank such as Abbey, paying 5.35 per cent. Ms Carter could earn more on her Tessa-only Isa by moving to Marks & Spencer, which pays 5.25 per cent.

Mr Yearsley suggests that the Windsor Life policy may not be good value, but there may be penalties for leaving the plan.

Ms Bowes says that the couple could think about putting money into the stock market more directly, through unit trusts or open-ended investment companies, with a view to building up a balanced portfolio. Mr Yearsley suggests that the couple could put money from their endowments into equities, through an Isa.


Mr Yearsley cautions that their pension arrangements are not even close to matching their current level of income. Mr Moore should put the money he is saving directly into a pension, as he will benefit from tax relief. If the couple are not happy with the pensions that are on offer, they could look at a self-invested pension. From 2006, these will be able to hold residential property as well as other investments.

Mr Modray says that Mr Moore would need to save about 25 per cent of his salary between now and retirement, in order to retire on 50 per cent of his income. This will be difficult, but he should review his pension arrangements to make sure his funds are invested with exposure to the world equity markets, as well as to other assets.

Ms Bowes suggests looking at a stakeholder pension provider that allows investment in a number of different funds, such as Legal & General.

Advisers' views are given for guidance only.

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