On the money

Financial Makeover NAME: JANE MIDDLETON AGE: 38 OCCUPATION: FREELANCE COOKERY EDITOR
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The Independent Online
Jane has just moved to Bath with her husband Peter, a business journalist. They have a pounds 112,000 two-year fixed rate mortgage at 4.99 per cent with Abbey National. The property is valued at pounds 250,000-plus and is being repaid 50 per cent via an endowment and 50 per cent through a personal pension.

Jane contributes pounds 224 per month into her pension but feels this is stretching her budget a bit far. Is that level necessary and should she consider moving the mortgage to a new lender for a better deal?

The adviser: Patrick Bunton, independent financial adviser and mortgage broker at Bath-based London & Country Mortgages (01225 408000)

The advice: First, let's consider the mortgage. The rate Jane is paying Abbey National is 4.99 per cent and set against the rates available today this is highly competitive. Due to this and the fact that she will have penalties if she switches her mortgage elsewhere it is in her interests to leave this alone.

Adequate pension provision is very important if she is to enjoy a financially secure retirement. Contributions made today will work harder for Jane than those made in the future (due to compounding interest) but she should remember that contributions made are not accessible before retirement.

As such, her wish to make long- term pension savings now should be balanced with an aim of having sufficient liquid funds to meet any emergency in the shorter term.

Peter and Jane have a healthy excess of income over fixed costs each month but they feel their budget is stretched, due to expenditure on the property. Jane had been paying pounds 127 a month into her pension earlier this year but now feels the present pounds 224 is pushing it.

There are no penalties for Jane reducing the size of her contributions which would balance more effectively her need for short-term liquid savings and longer-term savings for retirement. She could reduce the pension contribution a little and redirect the funds into a mix of cash- based deposit accounts or an ISA.

These would enable her to save regularly for the shorter- and medium- term and maintain long-term pension provisioning. This is particularly relevant. Being self-employed she wants to ensure she is able to meet future tax bills.

Pension-linked mortgages syphon off, at retirement, the 25 per cent per cent tax-free lump sum and use it to pay off the loan. Unless a fairly sizeable amount has been paid into a personal pension over the years, most people will retire on far less than half their final salary. Therefore, the 25 per cent lump sum can often form an important element of a pension option, allowing the purchase of a further non-compulsory annuity at higher rates. It makes sense to keep payments into a personal pension as high as possible, particularly in this instance, where a chunk will pay off the loan. But Jane and Peter's immediate needs must take precedence. Peter contributes pounds 142 per month to an occupational pension scheme. He could consider AVC contributions to boost retirement benefitsand balance this with short- and medium- term investments. Their property is now worth pounds 250,000. Peter and Jane could release capital from it to supplement their retirement planning and trade down to a smaller home after the children leave home. Overall, their position is healthy.

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