Wealth Check: Will we be able to retire early?

Andrew and Ursula Woodhouse, IT consultant and lecturer, London
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The Independent Online

The couple have £8,500 of savings in a Standard Life Bank "50-day notice" account. Andrew's grandfather recently died, possibly leaving an inheritance, but the full details aren't known as yet. Andrew and Ursula feel that they should be making serious investments at this stage of their lives. They're conscious that their only real asset is their house and are considering buying another property abroad to rent out.

We asked Colin Jackson of Baronworth Investment Services, Ray Boulger of John Charcol, and Lisanne Mealing of MDM Associates for advice on the couple's circumstances.

Case notes

Annual income: £30,000 (Ursula) and £80,000 (Andrew).

Savings: £8,500, "50-day notice" account, Standard Life Bank.

Pension: Andrew's company pays 5 per cent of earnings (currently worth £330 a month) into his pension. Ursula is a member of the final-salary Teachers Pension Scheme.

Property: They bought a property 10 months ago for £440,000. Estimated £160,000 in equity. Mortgage is part endowment-backed, part repayment, with Northern Rock, taken out November 2004. The loan is due to be paid off in 2019.

Monthly outgoings: £4,000 on their mortgage, holidays, savings and other items.

PROPERTY

Colin Jackson warns that owning a property abroad is not as straightforward as it might first seem. Apart from having to pay the mortgage, there will be many additional expenses.

The list will include building and contents insurance, local taxes, the cost of general maintenance, repairs and replacements, and the occasional flight out there.

If they intend to rent out the property, the maintenance costs will be higher but, if it is their intention to live abroad once they retire, then buying a property may make sense.

Even if they decide not to live in the property, at least they will be able to take advantage of any capital growth in its value that will help them to buy another property elsewhere.

There is an ongoing debate as to whether the buy-to-let market has peaked. Even if it has for the time being, bricks and mortar have, historically, never failed to produce in the medium to long term. It helps that the couple have considerable equity in their main residence - this will enable them to raise the deposit on a new place.

Ray Boulger adds that tax reforms will allow savers to buy an overseas property within a self-invested personal pension from 6 April, 2006. But whether this is practical will depend on many factors, including where the couple decide to buy. Buying through Andrew's pension fund would effectively enable Andrew to buy the property at a 40 per cent discount, but he will lose some control and the expenses are likely to be higher than if the investment was bought in his and Ursula's names.

PENSIONS

Lisanne Mealing would advise against purchasing property at present. She thinks Andrew and Ursula should focus on their pension schemes.

Under the new more generous rules, from April 2006, Andrew may be able to make use of some of his grandfather's inheritance to add a lump sum to his pension fund.

Boulger thinks that because Andrew and Ursula are in their mid-thirties, with very little invested in their pensions, retiring early with a decent pension will be tough. As the major earner, Andrew is only putting 5 per cent of salary into his pension, and the couple need to increase their pension savings.

Ursula is fortunate to be a member of a strong final-salary pension scheme, but she could think about making extra contributions in order to buy extra years of membership - she has only been in the scheme for three years.

Andrew should certainly consider adding to the employer's contribution in his pension scheme, particularly as a higher-rate taxpayer, because he will benefit from 40 per cent tax relief on any savings he does make.

SAVINGS

Jackson suggests they put at least some of the savings in the Standard Life account into a cash ISA, where interest would be tax-free. In the longer term, they should also consider stocks and shares ISAs. Making a monthly contribution would help them take advantage of a trick that statisticians call pound cost averaging, in which long-term savers benefit from short-term market movements.

Boulger says the 4.5 per cent that the couple earn on their £8,500 savings is respectable but not cutting edge. However, as this is effectively their rainy-day money, they should switch £6,000 to a no-notice tax-free cash ISA. Yorkshire Building Society's internet-based ISA currently pays 5.2 per cent, while Halifax's branch-based alternative offers 5.15 per cent.

Mealing also thinks the couple should move to an account where access is easier. She likes Northern Rock's Tracker Online, which pays 5.06 per cent before tax, or Chelsea's Rainy Day account, offering 5.13 per cent.

MORTGAGE

Boulger points out that Northern Rock's mortgages are generally fully flexible and that they allow unlimited overpayments without penalty. Therefore, in addition to increasing pension contributions, Andrew and Ursula should start overpaying on their mortgage each month.

This will progressively reduce their interest payments, creating a virtuous circle of lower interest payments each month. As a result, just by maintaining their monthly payments at the same level, they will steadily pay off more of the mortgage each month.

Any overpayments can always be borrowed back in the future if the need arises, so the couple could consider this money to be rainy-day savings.

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