Living to the full on part-time funds

Catherine Floyd and Michael Bosley
Ages: 40 and 41
Live: in Abergavenny
Occupations: Primary healthcare facilitator and healthcare promotion officer
Earn: ?27,000 combined
Mortgage: ?62,500
Debts: None
Investments: ?5,000 in a deposit account, ?5,000 mini cash Isas
Pension: Members of occupational scheme
Aims: To retire earlier than 65 to write and paint

Catherine Floyd wants to have her cake and eat it. She and her partner Michael work in the NHS, but both went part time five years ago when their daughter Mair was born. Although part-time working allows them to share in caring for Mair and pursue other interests, Catherine admits: 'The prospect of working for another 25 years with only a part-time pension to look forward to is depressing.'

The couple met in London in the mid-Eighties when they were training as nurses. They finally settled in Wales, where Michael comes from. Catherine now works two- and-a-half days a week in the primary care sector with GPs, dentists and pharmacists; Michael works three days a week in health promotion. Both have been members of the NHS pension scheme for 10 years full time and five years part time.

They want to continue working part-time, and would like to retire early too. 'We like our quality of life and being able to pursue our other interests,' says Catherine.

They have some savings, but the £5,000 sitting in their deposit account is earmarked for a car. They also have £5,000 in mini-cash Isa.

However, they are worried about their financial future. First, there is the mortgage which is part repayment, but mainly endowment and they face a potential shortfall on the endowment element. Their insurer, Scottish Amicable, has warned that, assuming 6 per cent growth, their policy's maturity value will fall £6,700 short of the amount they need to repay their loan, while if growth is only 4 per cent the shortfall will be £15,300.

So far they have not taken any corrective action. 'We felt that increasing the endowment to make up the shortfall, which was one of the options suggested by the insurance company, would be another mistake,' Catherine says.

Then there other financial outgoings on the horizon such as Mair's higher education costs. Catherine is saving the £250 per month she used to pay for a nursery in a cash Isa with Smile, but wonders if there is something better she could be doing with it.

Adviser 1: Gordon Wilson

The mortgage is a potential problem, but Scottish
Amicable is capable of delivering competitive
returns and it may yet cover the debt.

Even so, I would base any planning on the 6 per
cent growth rate assumption which points to a
?6,700 shortfall. This is not too serious given the
remaining term of the mortgage, as the value of
this will be eroded by inflation. Action should,
though, be taken to fill the gap. Catherine and
Michael could divert part of their monthly savings
to the lender to reduce the debt. A sum of ?50 a
month should solve the problem.

One issue they did not mention was protection in
the event of death or serious illness. Modest life
assurance is provided by their pension scheme,
but it would not be enough if one income was
lost. So, it may be of most benefit to buy some life
and critical illness insurance.

The benefits of investing in pensions sooner
rather than later can be quite considerable. The
most effective method is likely to be through
stakeholder pensions for which they are both
eligible as they earn less than ?30,000 per year.
Up to ?3,600 can be paid into these pensions each
year.

If savings can still be made I would then turn to
university costs. One of the best ways to save is
through an equity-based Isa if moderate risk is
acceptable. Over the term in question, this type of
investment is likely to provide better returns
overall and the amounts saved can be varied.

Gordon Wilson works for financial adviser
Thomson & Shepherd.

Adviser 2: Sharon Linnard

Catherine and Michael should maintain their
mini cash Isa balance due to the tax efficiency
that it offers. But to deal with any shortfall in the
maturity proceeds of their Scottish Amicable
endowment, I suggest they divert ?50 of their
monthly savings into increasing their regular
mortgage (not endowment) repayments for the
rest of the term. This would neutralise the
possibility of a shortfall assuming a 6 per cent
return. Should the endowment manage to
achieve a return of 8 per cent, they would receive
a greater surplus.

The remaining monthly savings could be invested
for the longer term to coincide with Mair starting
higher education and the repayment of the
mortgage. Subject to their attitude to risk, they
could consider an equi ties Isa, which could be
linked to an ethical fund. Leading funds are
Jupiter Ecology, Scottish Widows Environmental
and NPI Global Care Income.

Both are members of the NHS scheme, which is
based on final salary. Once in payment, the
pensions are fully index-linked, giving protection
against inflation. However, as their service will be
based on part-time employment, there is the
possibility of a shortfall in retirement income.
Therefore, they should consider making
additional voluntary contributions either towards
added years within the scheme or into the NHS
in-house money purchase AVC scheme.

Sharon Linnard works for chartered accountant
KPMG.

• Advice is for guidance only. Do you want to appear in Wealthcheck? Write,
including daytime and evening telephone
numbers, a brief list of circumstances and any
investments, to: Wealthcheck, The Observer, 119
Farringdon Road, London EC1R 3ER, or
e-mail: cash@observer.co.uk. You must be
prepared to be interviewed and photographed.