Wealth Check: Property and pensions provide the two big lessons for teacher Jamie
Jamie*, 36, wants to pay off the mortgage on the family home so he and his wife, Carol*, 35, can save more for their daughter's future.
The couple, who live in Preston with 20-month-old Millie*, are also looking at investing in a buy-to-let property as part of their longer-term planning. Jamie works as a tutor at a school in Blackburn, earning £24,000, and has been in this job for four years. Carol works part-time as a youth worker.
The couple have been careful about building up money, and currently have £25,000 in a cash individual savings account (ISA) with Santander, £3,000 in a regular savings account with Norwich & Peterborough building society, and £1,000 in premium bonds. They also save £500 a year into a cash junior ISA with Nationwide building society for Millie. While they have no investments at the moment, they also don't have any debts.
The couple live in a three-bedroom house which they bought in 2000 for £206,000. They now have a mortgage on this for £82,000 on a repayment basis. "This is a mixture of a fixed-rate deal [£60,000 at 2.49 per cent] and a tracker [£22,000 at 1.25 per cent]," says Jamie. "I pay the mortgage and Carol the bills."
Jamie currently pays £110 a month into his workplace pension, and also gets life cover through that scheme. In addition, the couple pay £20 a month for critical-illness and accident cover. However, Jamie is thinking about opting out of his pension and using that money as a deposit for a buy-to-let property.
"This would be an investment for Millie's future and also help fund a comfortable retirement for both Carol and myself," he says. "I'm looking to buy with a friend and we're each trying to save at least £200 a month for the next two years."
The friends then hope to have around £10,000 to put down on a run-down place they can renovate. "My theory is that by the time I get to 55 or 60, I will have paid off the mortgage on our family home and will also own a second property which I could sell, giving me a lump sum, instead of a pension lump sum. We would then have money to spend on Millie's education and things she'll need in the future."
Alongside this, Jamie hopes to have amassed £50,000 in his ISA by the time he turns 60. "I hope that the combination of the buy-to-let property, my ISA savings and 15 years of pension contributions – plus the state pension – will be enough for a comfortable retirement," he adds.
The cure
Our panel of independent financial advisers (IFAs) commend Jamie and Carol on having built up a good level of savings and avoiding debt. But they urge caution before stopping pension contributions into a workplace scheme, and recommend that a combination of both property and pensions may offer a better solution for their long-term planning goals.
Continue to build cash savings
While the couple have been sensible in putting most of their savings in cash ISAs, meaning all interest is tax-free, Aj Somal from Aurora Financial Planning urges them to check whether they could earn a better rate of interest. Useful sites for comparing rates include Moneyfacts.co.uk and Savingschampion.co.uk.
James Robson from Plutus Wealth Management adds that cash is the most appropriate way to save for short-term goals such as cars, holidays and a buy-to-let deposit, but over the long term cash can become eroded by inflation. "If some of the cash is designated as long-term savings, they could consider diversifying into investments," he says. "It's possible to transfer money from cash ISAs to equity ISAs while still retaining the tax wrapper."
Work on paying off the mortgage
Aiming to pay off the mortgage is a sensible goal, according to Mr Robson.
"As their current deals come with competitive rates of interest, they could consider making overpayments to reduce the balance further. Generally, lenders will allow borrowers to overpay 10 per cent of capital each year without penalty."
Think carefully about property
versus pensions
Patrick Connolly from adviser Chse de Vere points out that while many people plan on using their property to help fund their retirement, this can be a high-risk approach.
"I'd urge people to use property alongside pensions – not instead of them," he says. "Nobody can predict how residential property will perform in the future."
This is a view shared by Mr Somal. "I'd suggest Jamie continues to pay £110 a month into his employer-sponsored pension and then save £100 a month towards a deposit, along with his friend," he says. "He should then aim to do this for a four-year term. Buying a property is a long-term investment, and so is a pension. For this reason, it's better to be diversified in both types of assets, rather than to have all your eggs in one basket."
Mr Robson warns Jamie that he may need to save a deposit of 25 per cent to be able to source a competitive deal on a buy-to-let property.
"Equally, if he plans on renovating, he needs to ensure there is enough money to cover this too," he says.
In addition, Jamie and Carol need to factor in the costs of letting out a second property, and think about the risks of potentially getting bad tenants – or no tenants at all.
Be wary of opting out of workplace pension schemes
As Jamie will have access to either the teachers' pension scheme or the local government pension scheme, Mr Connolly says he should think carefully before giving up membership.
"These schemes provide excellent benefits guaranteed by the Government, which would be extremely hard to replicate elsewhere," he says. "While there are changes happening, they will still offer very good value, so my strong recommendation would be to continue making contributions."
Mr Robson agrees that by being part of a pension scheme and making contributions, both Jamie and Carol can take advantage of the tax benefits, allowing them to save for the future in a tax-efficient manner.
Mr Connolly adds that for most people, the best approach to retirement planning is a combination of pensions and stocks-and-shares ISAs. "Pensions provide initial tax relief but are inflexible, whereas ISAs are also tax efficient and give greater flexibility," he says.
Given the timescale involved with junior ISAs, Mr Somal suggests that for parents who accept the risks of the stock market, it may be worth looking at equity ISAs, as this should give better returns than sticking with cash.
Mr Connolly says a good option could be the Jump Junior ISA, which invests in the Witan Investment Trust, "a very large ... fund investing in shares throughout the world".
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