Bridging the savings gap

Sheryl Westbrook
Age: 50
Lives in: Lenham, Kent
Occupation: IT project consultant
Earns: Approx ?39,000 a year
Mortgage: ?73,000 tied until 2002
Debts: None
Investments: Tessa, Isas, Peps, Premium Bonds
Pension: Company pension and AVCs
Aim: To make up shortfall on pension or mortgage

While many parents are waving their children off to university, Sheryl Westbrook is welcoming one of hers back. Her 21-year-old son has returned home to live, just as she was hoping to concentrate on shoring up her financial position: 'The cost of funding two children through university depleted my capital to an extent that I have never dared calculate.'

She was also starting to cook when she wanted: 'I had got used to being by myself. When I got home from work if I didn't feel like cooking, I didn't. But now every night he asks what's for supper. He is a meat-and-two-veg person but steady on the two veg. He is an expensive commodity.'

Sheryl has lost her single person's council tax discount, so from January her son will have to pay board out of his wages: 'He will be charged £150 a month living expenses. That will make things a bit easier.' Sheryl thought she knew what to do to stabilise her finances, until she suffered a double blow. She has a £73,000 Woolwich home loan with a Royal & Sun Alliance endowment only intended to repay £57,000. The endowment was left over from a previous property when she divorced 10 years ago. She intended making up the £16,000 shortfall out of her investments: 'My plan had been to use my savings, apart from an emergency slush fund, to pay off some of the mortgage and bring it down to nearer the value that the endowment was meant to cover.' But she's been told the endowment has a projected £15,250 shortfall, so she is £29,000 short. 'The sum total of my investments is roughly the shortfall on the mortgage.'

She needs some of this money to build an adequate pension. She started paying £250 a month into an AVC five years ago. The AVC is with Equitable Life: 'From being reasonably OK about my future, I am now worried about where my efforts should be directed: pension or mortgage? Or should I cut the payments to AVCs by half and put the other half in a savings scheme? Not knowing what to do with money you are willing to put aside is my main problem.'

She has switched her con tributions away from Equitable Life but has not yet moved the fund: 'I don't know whether to take it out or not.'

Neither does she want to live like a hermit: 'I take at least two holidays each year and will not stop doing so.'

Adviser 1: Gordon Wilson

Sheryl's debt is uncomfortably high so, when
the mortgage is free of redemption penalties in
2002, I recommend a big effort to cut debt using
her capital. She can cash the Premium Bonds,
Isas and maturing Tessa. The saving on interest
charges can be used to reduce debt further.

Sheryl can then stop worrying about the
endowment shortfall. She should review her
remortgage options in 2002 to ensure she is not
paying more interest than is necessary, ensuring
any new mortgage allows overpayments without
penalty.

Ideally I would target AVC contributions to
maximise tax relief. Sheryl gets a tax break of 40
per cent on contributions but, in retirement, pays
tax at only 22 per cent. This assumes Sheryl is in
good health as AVCs most benefit those who live
longest. She's been doubly unlucky with an
endowment shortfall and an Equitable Life AVC.
Giving advice on Equitable requires complete
details and she should await the outcome of the
proposed compromise deal before acting.

If her P60 earnings were under ?30,000 last tax
year she can contribute to a stakeholder pension
on top of her main scheme, which provides better
benefits than AVCs.

The equity-based investments will hopefully
recover in time and should be held meanwhile.

Gordon Wilson works for financial adviser
Thomson & Shepherd.

Adviser 2: Gillian Cardy

The endowment will be repaid when Sheryl is 60
and I suggest she does not sell or surrender it
early. Royal & Sun Alliance is not a bad company
and the lower return predictions may be on the
gloomy side.

She should think about switching her mortgage
onto a repayment basis, at least the part not
covered by savings. When the redemption penalty
period expires, she should remortgage for a
better interest rate with a flexible mortgage. This
lets her clear the mortgage sooner by repaying
more debt with money saved by lower interest
payments. Her investments can then be used for
retirement income.

Given the penalties for transferring to another
AVC provider, there may be no benefit in moving
from Equitable Life.

She can nominate her two children to share the
three-times salary payable on death in service.
They need not be dependent, but she must
complete an 'expression of wish' form for the
pension scheme trustees. She might benefit from
approaching her finances like a work project.
Starting with what she has got, she should
identify the income she would like and by when,
working out the extent to which her existing
resources are adequate, then start plans to make
up the shortfall.

Gillian Cardy is principal of Professional
Partnerships Independent Financial Planning.

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