Marion Mitchell has just reached her 53rd birthday and she wants to make sure that she is making the most of her finances.
She recently decided to sell her house, as she felt she could get a good price for it. Her son has left home and she neither needs nor wants the responsibility of a large mortgage any more.
But she is unsure of what she should do next. She could buy a smaller property now, or wait a few months and then buy. She could go into long-term rented accommodation and use the money as a pension fund.
She has also thought about buying a house with her son, although she would continue to live there. This, she believes, could enable her to benefit from a longer-term mortgage and lower monthly repayments. It would also be a good investment for her son. But could she buy such a property on a buy-to-let basis?
MARION MITCHELL, 53, SUPPLY TEACHER
Debt: £6,000: five-year loan with Sainsbury's (8%), £4,000; credit card with Egg, £2,000.
Property: Recently sold.
Savings: £133,000 (including proceeds from house sale), 3.75%. Premium bonds worth £30,000.
Pension: Expects state pension plus £1,000 pa.
Monthly outgoings: Rent £300, loan and insurance £200, expenses £300, son's rent £230.
We put her case to Ben Yearsley at Hargreaves Lansdown, Justin Modray at BestInvest, and Ben Gibbs at Glazers.
Ms Mitchell has a large sum on deposit but she still has debts. Mr Gibbs estimates that with an interest rate of about 8 per cent on her loan, and up to 14.9 per cent with Egg, but interest of just 3.75 per cent before tax on her savings, Ms Mitchell could save £400 a year if she paid off her debts now.
Mr Yearsley says that if there are no significant repayment penalties on the Sainsbury's loan, Ms Mitchell should repay it now. Likewise, she should pay off the balance on her credit card. Mr Yearsley suggests that Ms Mitchell should then move her cash from her current bank to one that pays more interest. Abbey offers 5.1 per cent on its e-saver account, managed over the Internet. The AA's telephone banking account pays 5.35 per cent. Ms Mitchell should also ensure she uses her cash Isa allowance.
Mr Modray points out that Manchester Building Society pays 5.2 per cent gross, and ING Direct pays 5 per cent. Ms Mitchell has some premium bonds and these pay 3.2 per cent tax-free, on average. The return is not guaranteed, although there is the chance of winning a jackpot. But Mr Modray says that she should look elsewhere for a reliable income stream.
He thinks Ms Mitchell should look to put at least some money into the stock market through a good managed fund. She could do this through a stocks-and-shares mini-Isa. An income or corporate bond fund might suit Ms Mitchell's risk profile.
Mr Gibbs says that Ms Mitchell should ask the Pensions Service for a projection of how much she will receive from the state pension. She should also ask for a forecast from her occupational pension. This done, Ms Mitchell needs to decide how to balance her need to boost her retirement income against her other financial objectives. As Mr Yearsley points out, simply holding on to cash to provide a pension is not really an option, as inflation will erode its value.
If Ms Mitchell can join an occupational pension scheme, she should look at doing so. If that is not an option, then she should investigate Stakeholder pensions. These are tax-efficient but Ms Mitchell cannot simply transfer her money into a pension fund as a lump sum. The annual limit for a Stakeholder contribution is £3,600 a year gross, with somewhat higher limits based on higher earnings.
Mr Modray suggests that buying a property will give Ms Mitchell the most long-term security, although it will eat into her savings. But if she is able to buy a property for cash, then the money she would otherwise be paying in rent can go towards saving for a pension.
Mr Glazer says that continuing to rent will give Ms Mitchell the most flexibility, but less stability. If she were to buy, she would need to consider any mortgage very carefully, as a standard mortgage term would run beyond her retirement.
Mr Yearsley says there may be no immediate urgency for Ms Mitchell to buy. But over time, renting is dead money and if prices start rising again, Ms Mitchell could find herself priced out of the market. If she does opt to buy, it will put her in a position to help her son with his property needs. But if they buy together, Mr Modray recommends that they decide, in advance, on what they should do if one of them wants to sell the property and move on.
Mr Glazer adds that if Ms Mitchell does buy, she also has the option of taking in a lodger.
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