Wealth Check: What should they do with their savings?

A young couple with two children who have returned to the UK from abroad want flexibility in terms of a mortgage and have £100,000 in savings

In his 32 years Russell Brett has seen quite a bit of the world. His father was in construction and, while he was growing up, their family spent time in Cyprus, Nigeria and the Middle East. He attended boarding school in Berkshire and then went on to Southampton University, where he read modern languages. A few years travelling around East Asia and Australasia followed. He met Juliette in 1988 while he was in London and they soon got married. They have just returned to the UK after a couple of years living in Romania.

"Living abroad is in the blood," says Mr Brett, "but it came as a bit of a shock to Juliette. When we got married she'd had limited travel experience. We loved Romania, though. It's got a pretty bad reputation, but it's a hidden jewel."

They have two young boys, Samuel, aged two, and Finley, who is eight months. They live in a flat in Battersea, south London, but are moving into a three-bedroom house in Twickenham at the end of this month. "We automatically assumed we'd end up living in central London," says Mr Brett, "but when the estate agent showed us some houses in Twickenham we soon changed our minds. It's a real family environment and has lots of parks and open spaces."

Mr Brett works in Temple, central London, at the head office of a large international company. He has been with them for almost seven years. Although he has a company car, an E Class Mercedes, he commutes on the train, leaving his wife to make use of the car. "It's one of the perks of the job," he says, "knowing that if I'm out of the country she can get around OK." The company has a defined-contribution pension scheme.

The Bretts have paid off their £110,000 Abbey National mortgage on their Battersea flat, which they sold for £240,000, and have taken out a £245,000 mortgage on their new house. The policy is with Halifax and will be interest-only and fixed-rate for two years. Mr Brett said: "I might be posted overseas by the company in a few years, so we want to remain as flexible as possible. However, we would almost certainly come back to settle in Britain in around five years when the children are old enough to start school."

They have roughly £100,000 in savings, including £15,000 in a Generali savings policy and £25,000 in a five-year Albany investment plan which matures this year. Mr Brett also holds £10,000 in shares in his employer's company. They are planning to put the remaining £50,000 of their savings into paying off their new mortgage.

Mr Brett is not keen on sending his children to boarding school. "There are mixed benefits to private schooling," he says. "If the local state schools are good enough we'd like to send them there, but we'd also consider private day schools."

We put their case to Keith Jarman, director of Hughes Carne IFA, Alick Howard, consultant at MDM Associates, Darryl Connor, associate sales director at Towry Law, and Neil Waistnidge of ECS Financial Services.

Profile: Russell Brett, 32, and wife Juliette, 30

Family: Children: Samuel, two, and Finley, eight months.

Occupations: Mr Brett is a marketing manager; Mrs Brett is a full-time mother.

Education: Mr Brett went to Wellington College, Berkshire, and took a degree in modern languages at Southampton University; Mrs Brett took a degree in psychology at Sheffield University.

Income: Around £60,000.

Car: Mercedes E class.

Debts: £245,000 mortgage with Halifax, interest-only for 2 years.

Savings: Around £100,000 in savings policies and investment plans.

Pension arrangements: company pension.

Stocks and Shares: £10,000 in company shares.

Property: moving into three-bedroom Victorian property in Twickenham, Middlesex.

Outgoings: (Per month): food £500; utility bills £100; council tax £155; mobile phones £40; petrol £100; train £100; savings £50; mortgage £850; endowment £150; children's items £150; social £200; miscellaneous £200

'Wait on the mortgage, but get protection for your income'

Solution 1: Savings

Mr Howard says there are potential tax implications in Mr Brett's maturing Albany Life policy. If this is an offshore fund he may be liable to higher tax. He could assign the proceeds to Mrs Brett who, as a non-tax payer, will be able to cash it in using her personal tax allowance.

Mr Connor thinks the Bretts should save in an equity-based Isa to cover university expenses or to help fund any house move. although equities may be volatile in the short term, they should provide real value over 10 years. Mr Waistnidge says a 90-day deposit account would maximise interest.

Solution 2: Pensions

Mr Jarman says pensions from defined-contribution schemes depend mainly on the fund value, so Mr Brett should try to maximise his contributions. He has 40 per cent tax relief on contributions up to 15 per cent of salary, on top of what his company pays. And Mrs Brett could set up a stakeholder personal pension for tax relief on the contributions, tax-efficient investment growth, a tax-free lump sum with an income at retirement, and inheritance tax efficiency if written in trust.

Mr Howard also thinks Mr Brett could consider additional voluntary contributions (AVCs) to boost his pension, although this will provide only income, not cash, at retirement. He would have higher-rate tax relief on contributions. Or he could start regular Isa contributions, giving greater choice and flexibility.

Mr Connor says Mr Brett should note the choice of funds in his defined-contribution pension. Deciding on the right fund should be based upon the amount of investment risk he is prepared to accept and the time until retirement.

Solution 3: Mortgage

Mr Connor says the Bretts should find specialist mortgage advice. Truly independent mortgage brokers will assess all deals on offer and some larger ones may negotiate exclusive deals from specific lenders. He thinks the Bretts are right to reduce their mortgage because they have a sensible portfolio of investments. A prudent strategy would be to increase savings and investments while reducing their mortgage debt.

Mr Jarman says their fixed-rate mortgage, at about 4 per cent, is competitive but they should not rush to pay £50,000 off the mortgage from investments. With markets depressed they may lose by cashing in down-valued investments. They may be well-advised to remain invested in the market until the two-year fixed rate ends.

Mr Howard says if they repay part of the mortgage there may be a penalty, because they are still in the interest-only period. Despite this, they need to balance paying off the mortgage against investing capital. Mortgage money being cheap, they may gain a higher return by investing this capital rather than lowering the mortgage interest, although this means higher risk. After the interest-only period, they could consider a repayment mortgage to reduce the level of debt long-term.

Solution 4: Planning

Mr Jarman says that with a young family they should review cover for life, critical illness and income protection. They have no significant plans in place.

Mr Waistnidge says Mr Betts should check if there are death benefits from his employer and insure an income in case of death or ill health until the children are no longer financially dependent. He suggests a joint family-income policy in event of death, and an income protection policy. He also suggests placing £1,000 for each child into a National Savings Children's Bonus Bond.

Mr Howard says if they do move abroad, they could consider renting their property. They also need to take advice on UK tax liability and should clarify Mr Brett's ongoing pension rights while abroad. This could depend on his residency and tax status out of the country.

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