Buying a place in the sun doesn’t have to be a fantasy. Financial planner Jim Clancy helps two friends make their dream of retiring in Spain a reality.

Money Makeover:

John Bushby, 44, and his 50-year-old friend Paul Keniry work together in Gateshead as broadband consultants. They both earn £18,000 a year, taking home £1,200 a month after tax. Together they own a house and a flat, both mortgage-free, with a combined value of £222,000. They rent out the flat for £425 a month.

As well as having no mortgage payments to make, the friends have no outstanding debts and a zero balance on their Barclaycard and M&S credit cards, They spend approximately £630 to £650 each month on outgoings, including bills. They pay their savings into separate Northern Rock ISAs and each has £6,300 saved in these, plus they have a combined £12,365 saved in a Northern Rock fixed-interest bond.

Having rented a small apartment in Mallorca some 10 years ago, the friends are keen to return to the Spanish island and make it their permanent home. Despite their apparent healthy financial situation, both Paul and John are aware that they may be brought up short in their quest to buy a property on the island.

Even with the accumulated rental income from the flat, its subsequent sale and all their savings pooled, John and Paul wouldn’t be able to afford a modest Mallorcan property without taking out a mortgage - something they hoped to avoid.

The duo decided it was time to call in the help of a financial expert to see if their plans were realistic or simply a pipe dream. "We are desperate for some expert advice on how we can give ourselves the best chance possible to achieve our 20-year dream," says John.

Expert's advice

Jim Clancy, from Clancy’s Financial planning in Northumberland, specialises in advice for those planning major lifestyle changes, and so was the perfect adviser to help Paul and John work out how to make their Spanish dream a reality.

Ideally, the friends would like to move abroad in a couple of years, and have worked out that together with £425 monthly rent from the flat, they can save £2,000 a month to add to their ISAs and savings bond. Added to the sale of the flat, which they estimate would sell for £85,000, John and Paul would have nearly £170,000 in cash, falling short of the estimated £220,000 (plus an extra 15% in legal fees) that they would need to buy a property in Mallorca.

Unfortunately, the average property on the island costs around €480,000 (£380,200) compared with the Spanish national average of €240,000 (£190,100), and house price growth in Spain has increased by an average of 11% a year over the past decade. Despite all this, Clancy predicts growth will stall and believes John and Paul will be able to buy a property for the £220,000 amount they predicted.

"As in the UK, the Spanish property market is experiencing a downturn, and while prices on the island remain strong, I don’t think they will be immune from it," he claims.

Still determined to keep hold of their main UK house, Paul and John are also adamant they do not want a mortgage in Spain. However, is this possible, given that their calculations, and Clancy’s, show that they don’t have enough money to buy a property outright?

Clancy stresses the importance of looking at things from a long-term perspective. "What John and Paul have to realise is that their objective is to accumulate a pool of money - not only to purchase the property but also to fund their lifestyle," he says.

Changing timescale

Realistically the friends will not be able to buy their Spanish home in two years and should work out a different, more manageable timescale to follow instead.

The adviser gives two options.

"They could defer the move until 2018 and work until 2023, or defer their move until retirement in 2023. The advantage of the first option is that prior to moving completely, John and Paul would have time to settle into the area and continue building up their capital to ensure a secure retirement."

Putting the move on hold until retirement would also allow Paul and John to build up their pension pots in the UK and earn better rates of pay than they could in Spain. This is of course a long time to wait, whereas if they move in 2018, this would be long enough to do some serious saving and financial planning but still keep the Spanish dream in sight.

Pension plans

Currently, both John and Paul have stopped making contributions to their pensions, concentrating instead on the more immediate goal of buying a house in Mallorca. However, spending their pension payments is something they should reconsider if they want to enjoy the olives-and-San-Miguel-beer lifestyle John is especially partial to.

According to cashflow calculations, Clancy thinks that ideally Paul should contribute £795 a month and John £620 into separate stakeholder pensions. But he recognises that these figures are unrealistic when trying to buy a house at the same time, and suggests that they each downsize this to £350 a month, increasing the payment rates by at least double the rate of inflation (6%) between now and 2023.

"I recommend a stakeholder pension because charges are capped at 1%. The pension fund should be 60% in equities (of which 60% are in the UK and 40% international) and the rest in short-dated gilts and index-linked gilts," Clancy says.

Clancy favours the passive management option over active management, citing the fact that a large proportion of actively managed funds fail to beat the stockmarket index over the longer term, while only a handful do so consistently. He points to Legal & General which offers the largest selection of index-tracking funds in their stakeholder range.

"It’s still important for John and Paul to review their pension schemes on an annual basis," he says. Although Clancy doesn’t think that Paul or John need to switch their ISAs, he recommends that they check the interest rates each year to make sure they remain competitive. "They should continue to put in the maximum allowance, not only to purchase the house, but also to eventually help with any shortfall at retirement," he adds.

It’s also important to build up a reasonable amount of cash savings that will be easy to access and can act as an emergency fund. In the event of losing a job, this money would cover living expenses for up to six months.

Because Paul and John would like to sort out life cover, Clancy advises them to opt for a guaranteed plan. He suggests that they do not need life assurance now. Instead, they will need it when they retire, in order to protect their lifestyle.

"There are two options," he says, "a guaranteed terms assurance policy to age 84, which typically costs around £33 a month per person, or a guaranteed whole of life policy. This would ensure there is cover throughout their lifetime, but would cost between £105 and £159 a month."
However, to ensure the money passes on to either John or Paul, both policies would have to be written in trust.

Finally, Clancy strongly recommends that both men have wills drawn up. "They should use a solicitor who has experience with Spanish law on inheritance - it may be expensive but it will be worth it in the long run," he says.

John adds: "The makeover has made us a lot more aware of looking ahead - we don’t want to just set up and then find we don’t have the sort of quality of life we’re used to."

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