Help us retire early

The Profile

Maddie and Nick Templeton live with their two children, Oliver, six, and two-year-old Ben, in Bury St Edmunds, Suffolk. Nick, 44, is a deputy headteacher earning around £50,649 a year, and Maddie, 35, is a part-time teacher working three days a week and earns £18,000. After tax they take home around £3,700 a month.

When Maddie is at work Oliver and Ben are looked after in part by her parents and in part by using childcare vouchers from the Suffolk Education Authority - a scheme which allows employees to sacrifice salary for tax-free childcare vouchers.

They have a £420,000 home with an outstanding mortgage of £140,000 with Abbey that they repay at £1,178 a month. They have also taken out a car loan of £7,500, which they repay at £243 a month and have £2,330 remaining.

The Templetons have a variety of investments including £3,904 in cash ISAs; £7,642 in a unit trust with Skandia; £500 in a cash deposit account and two endowment policies, currently totaling £5,540 and due to expire in 2008 and 2010. They have invested Oliver and Ben's child trust funds in the Witan Jump and F&C investment trusts and have saved £3,500 and £2,000 respectively.

"We want to make sure we are getting the best returns on our investments," said Maddie. "We also want to retire as early as possible and set the boys up for university."

Expert's advice

Andrew Swallow, of Swallow Financial Planning in Ipswich, Suffolk, says by looking at Maddie and Nick's pension arrangements and projecting forward, they are on course to meet their retirement goals. "Pretty much everything about their finances revolves around their continued employment as teachers and the very generous benefits that the teacher's pension scheme provides," explains Swallow.

He says Nick can expect to retire on an annual income of £19,305 and Maddie on £8,991. "I have probably overstated Maddie's benefits (due to her being part-time) but the assumption is that she will return to full-time teaching when the children are older and hence her pension benefits will be higher," adds Swallow. "Also, assuming that teacher's pay rises faster than inflation - as it has in the past - their benefits could be higher than these figures suggest."

With their main pension planning sorted Swallow turns his attention to their protection arrangements. "It is crucial to look at the 'what-if' scenarios of death and disability," he says. In the event of either Nick or Maddie dying they would receive a death-in-service benefit from their employers equal to £151,947 and £58,320 respectively. The Templetons also have life cover with Norwich Union that would pay out £85,500. "If one spouse was to die, the survivor would probably continue to work in which case they have sufficient life assurance with Norwich Union for their needs," says Swallow.

As regards cover for disability and illness, the Templetons have a joint critical illness plan with Skandia totaling £55,000. They also have cover from their employers, which would pay out a lump sum of £57,917 for Nick and £26,973 for Maddie. "It's actually an early retirement benefit rather than an income protection scheme," explains Swallow. "So they get a tax-free lump sum.

"Overall, they are in a good position but they may want to consider increasing their critical illness cover or even, in Nick's case, taking out some income protection for a benefit of around £6,000 a year, to be paid out after 12 months of illness," he adds.

Next, Swallow turns his attention to their plans for their future and the teacher's pension plans mean they are pretty much set up. The Templetons are currently making addition voluntary contributions (AVCs) of £756 a month to a Prudential scheme to bump up their tax-free cash, but Swallow advises them to stop this straight away. "As a general rule the exchanging of pension benefits for more tax-free cash is a very poor decision. It would have been much better for Nick and Maddie to have bought additional years than entered into the Pru scheme."

Their remaining pension arrangements are adequate and they can redirect the £756 from the Pru plan to help with their savings for Oliver and Ben's future. "In retirement the couple will have an income of around £28,000 gross a year plus a lump sum of £85,000," explains Swallow.

"They will also have a small police pension for Maddie and at least £10,000 a year from state benefits after they reach 65. Although Maddie will only turn 60 nine years after Nick, they have tax-free cash to live off and Maddie predicts she will want to continue to work to cover the university costs for Ben."

Next on the agenda is their objective to build a university fund for the boys. Swallow suggests allowing a fund of £40,000 each to pay for university if Maddie and Nick don't want Oliver and Ben to graduate with any debt at all. "This is a big liability so they had better start sensible funding now," advises Swallow. They already have £3,000 saved for Oliver and £2,500 for Ben. "There's little point investing more into child trust fund savings as the amount allowed is far smaller than Maddie and Nick need to accrue."

To achieve two funds of £40,000, Swallow says the Templetons will need to save around £2,500 a year for 16 years for Ben and 12 years for Oliver. "This assumes that the investments grow at a rate of 3% above inflation in the years ahead, and I have allowed for a gap year as well," adds Swallow.

As the Templetons will be investing for the long-term for Oliver and Ben, he recommends they invest in equity ISAs to get tax-free growth and easy access to the funds. "If the children decide not to go to university then the funds are available for Nick and Maddie to use for any other purpose. The allowance is £7,000 a year so there's lots of room to fund at the levels they require," adds Swallow, who advises the Templetons to assess their attitudes to risk before determining suitable investments.

Nick and Maddie will need to rearrange their finances to meet the levels of funding needed. Stopping their Prudential AVC contributions will free up £756 a month - £9,072 a year. Swallow also advises them to stop the £100 payments into their Skandia unit trust; a further £243 each month will be available when their car loan with Peugeot is repaid, and they'll have two lump sums from the endowment policies when they mature. "But overall they have sufficient money" he adds.

Next, Swallow looks at the option of the couple paying off their mortgage early. "The current mortgage is on a competitive rate of 5.14%. If they increase repayments to repay the mortgage quicker, they could use the income saved to fund the university fees," he says. Increasing the monthly repayments from £1,178 to £1,500 would reduce the mortgage term by five years and make them mortgage-free in 2018.

"At this time, if the same savings - £1,500 a month - were invested earning 3% higher than inflation they would have £55,000 in the kitty by 2020 and £116,000 by 2023 - more than enough for university fees," Swallow explains.

Last on the agenda is the Templetons' estate planning. "Nick and Maddie have mirror wills that provide half the estate to the survivor and half to the children," says Swallow. The wills were made in 2003 and he thinks they look impractical. "At the moment, if one of them dies the other spouse would need all the cash to support the children. I advise them to ask a solicitor to re-write the wills to give all the benefits to the survivor so the loans can be repaid and any surplus cash used to support the family," says Swallow.

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