I must make it third time lucky

Clare writes: 'I was left with nothing after my divorce. I had always paid the mortgage and bills. My ex-husband earned little and the legal process deemed that I had a duty to support him - I nearly ended up paying maintenance. My only option was to let him have the house and contents.

I then met Andy, who sold his house so we could buy something larger and I could work from home instead of renting expensive offices. We reached a point where we had amassed £20,000 in savings after six years together. I have been a self-employed training consultant for 19 years. Andy was an HGV driver for 20 years and has been a junior civil servant for the last three, earning £13,500. He also earns £300 a month as my company secretary. I turn over between £70,000 and £80,000 a year, of which around £40,000 is profit.

Just before Christmas, I was hit with a tax bill for £23,000 including interest that went back seven years. My accountant had assured me this was incorrect and was nothing to worry about. He hadn't told me that he had spent the intervening years occasionally pursuing this bill with the Revenue to no avail. This bolt from the blue arrived at the same time as the usual January tax bill, meaning we had to find £33,000 in one fell swoop.

All our savings were lost and I, for the second time, lost my capital other than the small amount of equity in the house.

Last year we sold our first house for a profit of £30,000. We paid £165,000 for a new home with a 20-year Abbey flexible mortgage of £135,000 and spent £20,000 getting it up to scratch. We are overpaying the mortgage by £100 a month and will continue to do so, unless rising interest rates make it too expensive. I pay a total of £80 a month into two small pensions and a lumpsum pension worth £12,000, which might generate a few pounds a month income. Andy has a worthless pension with Abbey Life and three years of Civil Service pension.

We have no debt other than our mortgage, saving of £16,000 in cash Isas and an equity Isa worth £3,000. We have a couple of endowments, no longer tied to the mortgage, worth £30,000 in total. We save in a postal account to pay our tax bills.

I am nearing 50 and my husband is 48. We are acutely conscious that we need to do something soon to plan for our future but we have no idea where to start. At the moment, neither of us sees any alternative to working until we drop dead.

We have toyed with the idea of buying property to rent out but are not sure if this would be sensible.'

It's not too late to save for your retirement



You are starting pension planning quite late in life, but you do have some time in hand. First you need to get a better understanding of the pensions you already have. Find out from the pension providers exactly where your money is invested and how much the plans are worth.

You might then think it worthwhile moving the money to cheaper pensions, says Elizabeth Gibling, life and pensions manager at Chase de Vere Investments. 'Many providers have changed the charges on newer pension plans to a 1 per cent annual management charge or less. But they should take into account any penalties or transfer charges they might suffer and whether they would lose any guarantees or other enhancements on transferring.'

Do not touch Andy's Civil Service pension, Gibling says: 'Although the Civil Service pension will be quite small, it is particularly valuable as the benefits are guaranteed. Andy should request a statement of his benefit entitlement from the scheme trustees so that this amount can be factored in to their retirement plan.'

There are two ways of deciding how much to save in a pension. You can calculate how much you can afford from your income or you can estimate how much income you will need in retirement which will show the extent of the shortfall. Gibling sayspensions are expensive to buy later in life: 'A man wanting an income of £10,000 a year at 65, starting to make contributions from age 50, has to contribute £482 a month.' That is six times the amount you are saving.

The next question is where to invest. It does not have to be in a pension scheme although they have the advantage of having tax relief on contributions. You could put some money into equity Isas, where the growth is tax-free. With either you can choose your level of risk.

Buying property to rent limits your risk to the property market and substantially increases your debt. Your existing mortgage is already a problem because you will be 69 before it is repaid. Abbey says that, if you continue to overpay £100 a month, the length of the loan falls by two years and nine months, which is still past the official retirement age although just about in line with Andy's retirement at 65.

Your current mortgage repayments are £810 a month and eliminating that expense will transform your budget. Your discounted interest rate is going up to 4.5 per cent on July 1 following the latest base rate rise.

Your fears of working beyond retirement age are justified, although you might be able to reduce your workload and gradually phase in retirement.

You could consider selling your endowment policies to reduce your mortgage, says Gibling: 'The decision to surrender depends on how much they could potentially save by making a part redemption of the mortgage versus any potential growth they could have from the endowment.' If they are with-profits endowments, Gibling advises you to sell them through a broker rather than surrender them to the insurance company: 'But they should also be aware that, depending on the funds they are invested into, they could suffer more by surrendering or selling early, rather than maintaining them until maturity.' You will then need to replace the life insurance element with cheaper term insurance.

You should take issue with your accountant, who appears to have let you down. He should at least have kept you informed of what he was doing. Contact whichever accountancy body he belongs to and make a formal complaint. Unfortunately, even if an accountant's actions land you with a larger tax bill than necessary, the Inland Revenue still holds you responsible.

Clare's to do list

1. Find out the details of your existing pensions

2. Consider switching them to a cheaper scheme

3. Calculate how much income you will need in retirement

4. Invest more for your retirement in pensions and/or equity Isas

5. Think about selling your endowments to reduce your mortgage

6. Make a formal complaint about your accountant

Let us help you



Do you need some financial coaching? We help readers to solve their financial challenges. This might be to stop spending and start saving, pay off debts, plan a pension or even to choose a bank account. You do not have to be identified. We deal with as many cases as possible in the paper but cannot give personal advice if your letter is not selected for publication. Write to: Money Coach, Cash, The Observer, 119 Farringdon Road, London EC1R 3ER or email: cash@observer.co.uk

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