Lesley and Tim Sheldon are 47 and 48 respectively, married, and live in Hampshire. They have no children, and their primary financial goal is to pay off their mortgage as quickly as possible while setting aside enough of a nest egg to let them have an early – and comfortable – retirement. "What really concerns us is how to make the most of our disposable income and investments," says Tim. "There just seems to be such a bewildering array of options."
Lesley, who works for the National Health Service, and her husband, Tim, who is an engineer, are hoping to retire when Tim turns 58. They are looking at medium-risk investments that will ensure a maximum return in 10 years' time.
Their mortgage is not yet paid off, however. "A comfortable retirement is obviously a very important priority for us," says Lesley. "But we still have 12 years to go on our mortgage. Life will definitely become more relaxed when that is wrapped up!"
We asked three financial advisers for their suggestions: Alex Pegley from Calculis Limited, Danny Cox from Hargreaves Lansdown, and Dane Halling from Arcturus.
Lesley Sheldon, 47, NHS education and Tim Sheldon, 48, engineer, Hampshire
Income: Lesley: £40,000; Tim: £50,000
Pension: Lesley: £300 and Tim: £50 per month. Both payments are topped up by their employers
Savings: £2,000 per month towards cash and equity ISAs and life insurance
Property: A £500,000 house; the couple have 12 years left on a 14-year mortgage
Monthly outgoings: £1,800, including mortgage
While Dane Halling and Danny Cox both feel that Lesley and Tim are in a strong financial position, it is clear that, if they want to retire early as well as pay off their mortgage, they will have to step up their long-term savings considerably. While the pair are on course to earn pensions worth around half of their final annual salaries after tax, they are aspiring to retire slightly early, and on an income equivalent to around three-quarters of their joint salaries today.
Cox says that retiring two years early is an expensive decision; this could lead to a drop in their final salary payment of more than £2,000 a year. "For the best value from these pensions, they should be left until the normal retirement date," he says. To make up the additional retirement income, Cox suggests that Lesley saves an additional £625 a month into a pension which, as a higher-rate taxpayer, would only cost £375 from her net salary. "Based on a 7 per cent return, this would provide another £3,800 per annum from 60," he says.
Pegley says that "as their only debt, it would make sense to reduce the length of the mortgage from 14 to 10 years. Although it may seem expensive, their repayments would increase to £1,370 on a fixed rate of 6.18 per cent from Nationwide." Nationwide also allows for penalty-free overpayments, should their budget permit.
Halling says that another option open to the couple is to increase the monthly contributions into their equity ISA funds, making full use of their annual allowance over the next few years, and using the proceeds to make overpayments on their mortgage.
Cox agrees that Lesley and Tim should make the most of their equity ISA allowance. Given their manageable mortgage, healthy combined earnings, and having some insurance in place, they should each consider paying in the full £7,000 that they are permitted in every tax year.
Despite the recent turmoil in the market, long-term growth looks strong: Cox says that "£1,000 saved per month into equity-based funds at a 6 per cent growth rate will become £163,000. These funds are also free from capital gains tax until their encashment."
Hallings suggests doing a risk-profile exercise which will put them in a good position "to take a confident view as to their overall investment picture". He recommends investing their ISA allowances in established funds which have good long-term records, such as Artemis UK Special Situations. "Following the recent market falls, there are also top-quality investment trusts, such as British Empire Securities, which are very accessible," he says. "If you can look beyond next year, it can be viewed as an opportunity. I would look towards having seven to 10 funds with even allocations in each, and then consolidating the list over time as you become familiar with specific funds."
Keeping an emergency fund is important, but it may be necessary to discuss what is "adequate". Pegley recommends that the couple aim to keep around three times their net monthly salary in savings accounts. They should retain their existing ISAs, but should switch to better deals for their cash savings. National Counties Building Society pays 6.01 per cent.
Cox suggests that as they both have death-in-service benefits, there is little point in continuing the Whole of Life plan. He says they should consider what would happen if one of them suffered from a long-term illness which prevented them from working.
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