Do you have enough money to retire?
Adrian Todd, 49, lives in the Tingley area of Wakefield with his wife Carol, also 49. They have two adult children, Rachel and Liam, who still live with them but are financially independent.
Adrian currently works part-time for Wilkinson Hardware Store, having been made redundant at the start of this year from his job in printing.
He earns approximately £360 a month after tax (depending on shifts), while his wife works part-time as a customer service adviser for Debenhams and earns £276.80 a month after tax.
The couple pays £485 a month towards their Alliance & Leicester interest-only mortgage, on a fixed rate of 4.04%.
Their property is worth approximately £230,000, and last year the Todds increased the mortgage on their main home to £140,000 to buy a £107,000 rental flat, now valued at £114,000. They receive £441.25 a month in rent, including letting fees.
Adrian has credit card debts totalling £3,400 with 0% interest, £2,000 of which is with Virgin Money and £1,400 with MBNA. He pays off £40 a month on both cards. Carol has £1,000 in her Halifax current account.
She also has £500 invested in the Troy Income & Growth Investment trust, which pays out twice yearly dividends of £10. In addition, the couple has 200 Standard Life shares, worth around £380.
Pension-wise, Adrian has a preserved pension with Polestar, which will pay out £3,472 a year, as well as a £3,458.81 lump-sum payment, based on him retiring at 65.
He also has a preserved pension (one to which he no longer makes contributions) of £10,281 a year with R R Donnelly; an additional voluntary contribution (AVC) fund with Legal & General of £11,507; and a Standard Life personal pension valued at £10,461.
"After working full-time for over 30 years in various jobs, I found myself unemployed. I love my new job and hope to continue to enjoy my current lifestyle, but I worry about the future and want to plan for a smooth transition into the time when I can start to claim from my works pensions," says Adrian.
The Todds need to address their credit card debts sooner rather than later, says Romy Melville, chartered financial planner for Atkinson Smith in Doncaster. He suggests they sell Adrian's Standard Life shares and possibly the Troy Income & Growth fund.
"This would release approximately £880 and reduce the credit card balances by 25% to approximately £2,520," she says.
Melville also calculated the total household income and total expenditure. Currently, the total income of £1,300 exceeds household expenditure, which is £1,260 a month, so an extra £40 a month could be put towards the credit card debts.
However, there is a shortfall of £44 a month on the rent received from the one-bedroom flat the Todds let out. It was bought for Adrian to live in while working shifts at his previous job, but it now inadvertently represents the Todds' main investment.
Adrian has a broadly low-to-medium attitude to risk, but single buy-to-let properties carry higher risk, especially if finding tenants is a problem.
"Property as an asset class within a broader investment portfolio can be considered low-to-medium risk, but when held within one fixed bricks-and-mortar investment, the risk is considerably higher," says Melville, who suggests selling the property.
"Based on a current value of £114,000 and a purchase price of £107,000, the capital gain of £7,000 falls within the annual exemption, currently £10,100, so no tax would be payable."
Another option is for Adrian and Carol's son Liam to buy a share of the flat, but Melville doesn't recommend this as they would have to share the rental income and it would leave Liam relying on capital growth from his investment to make any profit.
If Adrian and Carol decide they don't want to sell the flat then Melville suggests Adrian works until he is at least 60 and starts looking for a full-time job with access to further pension provision and other employee benefits.
She says: "If Adrian stays at Wilkinsons I recommend that he considers joining its pension scheme, which should also make him eligible for death-in-service cover."
This is where employers typically pay out between two to four times the employees' salary in the event of death – but it isn't universally offered.
Adrian will receive the full state pension at 65 (forecast to be £111.29 a week), as well as the various pension arrangements he has paid into in the past. The minimum age for drawing benefits from these schemes is 55, but Melville suggests that Adrian delays taking his pension as long as possible.
"Taking benefits at age 55 will significantly reduce the benefits within his final salary schemes [with R R Donnelly Pension and Legal & General] – probably by 45% or more," she says.
The Polestar pension scheme is underfunded and members of the scheme have been advised that the scheme is struggling.
"Adrian should obtain a transfer quote from Polestar with full details of the current funding position and penalties for early retirement, then consider his options further," advises Melville.
If the funds were to be transferred, 25% of the fund would be available as a lump sum of £8,745, compared with just under £3,500 available for staying in the scheme.
Carol doesn't pay into her company's pension scheme and has no private pension provision but will receive pensions from each of Adrian's schemes should he die first.
The amount is unlikely to repay the current mortgage, according to Melville, who advises the Todds to take out a life insurance policy.
"A 10-year level term policy providing £140,000 on Adrian's death would cost approximately £24 a month. If the flat is sold and the mortgage is reduced to £35,000, a 10-year level term policy to cover this liability would cost about £9 a month or £35 a month with critical illness insurance included."
Adrian could use his pension to clear the £35,000 shortfall, but Melville suggests he increases his working hours or even looks for a full-time position and then starts paying off capital on his mortgage.
The final thing for the Todds to do is get a will drawn up. "Because my situation has changed so much – going from a well-paid full-time job to earning £90 a week – I need to look at all my finances, and this review has been really helpful to get another opinion instead of looking at things with a rose-tinted view," says Adrian.
Romy Melville is a chartered financial planner for Atkinson Smith in Doncaster. Visit atkinsonsmith.co.uk or call 01302 346 822.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.