Wealth Check: 'Can I save while keeping money aside for studies?'

James Dutson is currently a Major in the Army, serving in the Falkland Islands. He will leave the forces in December after seven years' service.

He plans to work for a charity organising overseas projects for young people until September next year. During that time he will not be able to save, but will be able to meet small outgoings. He then plans to take a two-year postgraduate law course, which will lead to work as a solicitor.

Mr Dutson has been able to save well, has recently sold his primary residence for a profit of around £25,000 and also has an investment property.

He wants to know if he should start a pension or if savings and property will be enough. He wants to know the best way to save £25,000 - possibly putting up to £10,000 into higher-risk investments - but needs to keep£15,000 for university and living expenses.

James Dutson, 31, Army Major

Salary: approx £40,000

Education: BA (Hons) in Politics, University of Sheffield

Debt: Mortgage

Property: Buy-to-let property worth £140,000. Interest-only mortgage of £88,000. Rental income £475.

Savings: In Smile Savings account, paying in £800-1700 a month. Aims to have £50,000 saved by December.

Investments: None

Pension: Will receive small army pension at 55.

Outgoings: Food and rent for officer's mess£300. Other outgoings £150 a month.

We put his case to Anna Bowes at Chase de Vere, Philippa Gee at Torquil Clark and Patrick Connolly at John Scott & Partners.

SAVINGS

Mr Dutson's first step should be to use his £3,000 annual mini-cash Isa allowance, says Mr Connolly, as these pay tax-free interest. Abbey's postal Isa currently pays 5.1 per cent.

Good options for the balance of his money include ING Direct, paying 4.7 per cent, and Cahoot, which Ms Gee says has an attractive rate for new savers of 5.5 per cent. Ms Bowes says that Mr Dutson could also consider a building society fixed rate bond: Birmingham Midshires pays 5.61 per cent.

PENSION

Mr Dutson cannot pay into a Stakeholder pension if he has an occupational pension with the Army. The good news is that he will be able to do so when he leaves, even if he has no income.

Ms Bowes points out that Stakeholder rules allow a contribution of £3,600 a year regardless of income. Tax relief means that this will cost him £2,808. She suggests that Mr Dutson sets aside some of his savings to fund his pension until he starts earning. Ms Gee, however, thinks it might be best for Mr Dutson to wait until he is back in the UK, when he will have a clearer idea of his study plans.

INVESTMENT

As long as Mr Dutson has enough cash for his non-earning years, he should be able to put some money into the markets. Ms Gee says he should only do this if he is willing to leave the money there for 10 years, and that he limits his investment to between £10,000 and £15,000 initially.

Ms Gee suggests global funds run on a multimanager basis, such as Credit Suisse Multimanager Constellation Portfolio and Jupiter Merlin Growth, although both do involve risk. Ms Bowes favours ISIS UK Prime or Fidelity Wealthbuilder, and says that Mr Dutson could consider using his full Isa allowance - £7,000 this year and next - to shelter his investments from tax.

Mr Connolly favours diversified funds and suggests the Threadneedle Global Equity & Bond Fund, but feels that limiting the investment to the mini-Isa allowance of £3,000 might be more appropriate.

PROPERTY

Mr Dutson has a strong position when it comes to savings, but our panel is less sure about his property investment. Mr Connolly points out that a large percentage of Mr Dutson's overall wealth is tied up in one property, and he is exposed to the very real risk of rising interest rates. With a rental income of £475 and interest of £430 there is not much room for manoeuvre.

Ms Gee agrees that the property is not working hard enough. With an interest-only mortgage Mr Dutson is not improving the equity in his property and so depends entirely on the housing market for capital gain. She suggests that Mr Dutson should talk to his estate agent about increasing the rent or cutting charges. If not, he might do best to sell the property now and use the funds for a home when he returns to the UK, when the market should be calmer.

Ms Bowes thinks Mr Dutson should set aside a contingency fund of around £3,000 to cover any rent shortfall. Mr Connolly says that one option Mr Dutson might be considering - using his savings to pay down the buy-to-let mortgage - could be counter-productive. This is because his interest charges can be offset against his income from the property. Increasing his equity in this way will also increase his tax bill.

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