Going spare about leftover money

Andrew and his partner Jeff expect to have money spare each month once their £50,000 flexible mortgage and car loan are paid off in June. They cannot agree what to do with it and write:

'We both work in the NHS. Andrew, 44, is a manager earning £50,000 and Jeff, 50, a nurse, earning £25,000.

For the past three years we have been overpaying the mortgage by £1,000 a month rather than saving. We spend modest amounts on clothes and personal possessions so most of our income after next June will be disposable.

Because of his higher income and younger age, Andrew would like to invest in property, but Jeff thinks we should put the money in savings. Andrew thinks we could buy a more expensive house so we could downsize from a higher point in 10 or 15 years' time - or buy to let, although he is concerned that the property market has peaked and the rental market in Sheffield may be over saturated.

Our modest four-bedroom Victorian terraced house is worth about £160,000, but taking the next step up the property ladder costs twice as much as it did a few years ago. If we wanted the same space in a better area, it would cost another £60,000. Another thought is to spend around £20,000 on an extension.

Jeff is reluctant to take on more debt as he would like to retire at 60 and wants to be free of debt for his last 10 years in full-time employment.

He worked in America for 10 years and in the Post Office for six, which will provide a tiny pension. We both now rely on paying into the NHS pension scheme. So far Jeff has 11 years' NHS service and Andrew 17. We have been shy of investing in additional pensions as they won't benefit the surviving partner. Jeff investigated but didn't perceive a benefit in buying extra years because of his shorter NHS service.

We like the idea of having the flexibility to work four days a week and are weighing that up. But we also want a few years with less drain on our resources because we are conscious that we are house-rich but cannot realise that capital, which makes us cash poor.

Our only debts are the mortgage and one car loan. We both have Abbey National cash Isas with a total £4,300, savings accounts with £4,700, which we use for holidays and home improvements, premium bonds worth £500 and Halifax shares worth about £1,600.

We are not materialistic but we don't want to have to worry about affording holidays or the cost of eating out.'

Action plan

Jeff's pension from the NHS will be only around
?6,500 a year and he needs to act urgently to avoid an
impoverished retirement. Rather than going part-time in
the next 10 years, he might have to think about
working beyond 60. Andrew's pension at 60 will be
about ?20,000, so he has less of a problem.

Ruth Whitehead, principal of London-based Ruth
Whitehead Associates, says: 'Jeff has the greatest
problem but he is the one wanting to do least about it.
He needs to do some lateral thinking. I urge him to do
something significant over the next 10 years and to
start it quickly.'

The NHS is a good pension scheme but, like most, it
does not yet recognise same-sex partners. The
scheme is also currently under review, which adds to
your uncertainty. Any changes will not be agreed
before 2005, and will then take some time implement,
so anyone retiring before 2013 is unlikely to be
affected. Jeff might be. The review is looking at equality
issues, so could start giving pensions to same-sex
partners, but no pension scheme these days can afford
to be generous and it may take away the option of
retiring on a full pension at 60.

You each need to make independent provision for your
own pension, says Whitehead: 'Lesbians and gay men
all have to make extra provision for their old age
because they are not entitled to benefits from their
partners' pensions. They pay the same contributions
as their married colleagues but cannot pass on
pension benefits when they die.

'The Government intends to introduce registered civil
partnerships, or so-called "gay marriages", but there is
no timetable for this and Andrew and Jeff need to do
something now.'

There is no logic behind your reluctance to put more
money into the NHS pension scheme and Jeff should
think again about buying added years, says
Whitehead: 'Although this is expensive, the outcome is
more certain than investing in equities.'

You could each choose to spend the spare money
differently, but whatever one does will impact on the
other, and you both want to be comfortable with the
other's decision.

Whitehead favours spreading retirement savings
between property, pension and investments: 'It is best
to have more than one financial strategy for the future,
and property is inevitably part of that.'

Building an extension is the least profitable option,
unless the additions add substantially more to the
value of the house than they cost to build.

Moving to a more expensive house means taking on a
larger mortgage than the one you are about to pay off
and negates your hope of becoming debt-free.
Because you are both older, you will have to borrow
over a comparatively short period, which further
increases the monthly repayments.

The high student population makes Sheffield a good
city for buy-to-let and White head believes that wisely
chosen property can still be part of a long-term
investment, although she warns: 'Buy-to-let is not for
the fainthearted.'

With buy-to-let, the rental income could cover the cost
of the loan and other outgoings, but you will need to
put down at least a 20 per cent deposit and may need
to redecorate and furnish the place. You should not
cash in your existing investments, which are your
safety net, so you would have to draw down on your
flexible mortgage. Borrowing is unavoidable.

But investing in more property means that the bulk of
your investments are tied up, so you should also put
the maximum into cash Isas and start investing in unit
trusts or investment trusts, possibly through equity
Isas, to have a foothold in the stock market.

Whitehead warns: 'It is no longer sensible just to
expect pensions alone to support us in old age, and
we all need to make other plans, including property
and capital investment to beat inflation, which
inevitably means an element of risk.'

Andrew and Jeff's to-do list

1. Jeff must take immediate action on his low
pension.

2. Both should contribute more to the NHS
pension.

3. Consider buy-to-let but make sure any property
you choose is good value.

4. Keep saving in cash Isas.

5. Start investing in equity Isas so not all your
money is locked away.

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