Wealth Check: 'I want to start a pension plan and buy myselfa bigger home'

Kirsten Smith, 37, from Warrington, is a speech therapist for the NHS. Having not yet started saving for a pension, she is terrified of addressing how she plans to fund her retirement. "I don't think about it because it is all too scary, and I think of the short-term future first," she says. "I opted out of Serps but I'm not sure what that really means."

Meanwhile, Kirsten is keen to upgrade her home, currently worth around £95,000, to a larger property. But with a fixed-term employment contract, she is struggling to find a mortgage lender who will consider her application for an offset loan, even with her "very healthy" debt situation.

Three advisers suggest ways in which Kirsten could improve her financial situation: Alex Pegley from Calculis, Ben Yearsley from Hargreaves Lansdown, and Kevin Anderson from Budge & Co.

Case notes:
Kirsten Smith, 37, Warrington
Salary: £27,000
Monthly spending: £780
Mortgage: £57,000
Savings: £8,000
Pension: £0
Debt: £6,500

Pension

Kirsten's preconceptions about pensions, savings and investment could significantly hinder her financial wellbeing. Our advisers urge her to start a pension as soon as possible, particularly if she is eligible for an occupational scheme.

"Kirsten is burying her head in the sand. She is still young, but she needs to start some very serious provision now before she leaves it too late," warns Alex Pegley. "Being on a fixed employment term, she may not be eligible for the NHS scheme, but if not, she should try for a permanent position purely for the pension. The scheme is excellent, and one of the best reasons for working in the public sector," he adds.

Assuming Kirsten wishes to retire at 65, Ben Yearsley estimates that she will have to save £420 every month into a pension to a achieve an annual income in retirement of £10,000. "She must get over her fears," he says. "Delaying by just three more years will bring that income to under £8,000 a year."

He suggests a personal pension or self-invested personal pension (Sipp) and recommends the Schroder Managed Balanced or Standard Life Managed funds to match her risk averse approach.

Savings & Investment

Kirsten has £5,000 in a current account, which Kevin Anderson believes is too much. She should take her ISA allowance for the year if she has not yet done so. National Savings offers 6.05 per cent interest with instant access.

If she has already used her tax-free allowance, Anderson suggests a Northern Rock online Tracker account, paying 6.49 per cent – although this will drop back to 5.25 per cent after the first year.

He points out that, for the moment, this also has the added security of being backed by the Government's guarantee. Our panel unanimously advise Kirsten to contribute to a premium ISA once she has addressed her pension savings plans.

But Kirsten's very conservative attitude to risk is frustrating, says Yearsley. She feels that she cannot afford to risk any capital at all which he suggests leaves her only options to invest in National Savings or cash. "If she truly wants to avoid risk, Kirsten should simply invest in cash and look for the best-rate payers at the time."

However, Pegley believes that she should re-evaluate her attitude to risk: "Investing for the long-term volatility in the market can be largely overlooked as over time the effect is ironed out," he says. "In fact, over the long term, investing in cash is riskier than equities – over 18 years, cash will underperform 90 per cent of the time."

Mortgage & Protection

The panel agrees that the current housing market slump is the best time for Kirsten to save some cash for a larger property. Kirsten is keen to use her savings to offset a mortgage, but Yearsley warns against it. "Offsetting works best for higher-earning taxpayers, and I don't think Kirsten will get any real benefit from using her savings this way," he says. "The amount she saves in tax will probably be offset by the additional cost of the mortgage compared to a good discount rate."

But if she is set on the offset vehicle, Pegley recommends Kirsten's current lender, ING Direct, which has an offset product lending up to four times her income. Assuming Kirsten can accumulate around £45,000 in equity, he calculates that she could spend around £130,000 on a new property.

Although Kirsten doesn't have a family, all three advisers believe that she should consider income or salary protection. With a temporary contract, she may not be eligible for permanent health insurance (PHI) but she should investigate a protection policy and arrange a will as soon as possible.

To find an independent financial adviser in your area, visit www.unbiased.co.uk

For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS or e-mail cash@independent.co.uk