Mortgage, pension - and all that jazz

Vital statistics

Paul Milnes

Age: 54

Lives in: South London

Occupation: Education adviser for information technology

Earns: £26,400

Mortgage: £55,000

Debts: Bank loan £1,800, credit card £600

Investments: Around £5,000 in shares, £5,000 in bank account

Pension: Member of occupational pension scheme

Aim: To check effect on pension and mortgage of going part-time

Paul has a passion for playing jazz piano. So great is his enthusiasm that two years ago he cut a day off his working week in order to spend more time at his piano. He is now planning to reduce it by another day from January. This means he will be working three days a week at the University of North London, where he provides computer training for primary school teachers.

It is not that there is not enough to do at work. On the contrary, Paul says giving up now is difficult because of the growing emphasis on technology in schools. He has delayed his further cut from September until next January because of his department's workload.

But he feels taking time off is the only way to go where he wants with his music. He has already noticed the difference: 'It has been beneficial, not only in performance terms but in an increased sense of well being.'

Nevertheless he admits to concern about finances. He has been getting some gigs, but he admits: 'You don't make a fortune from jazz.' When he cuts his days, his salary will reduce by a further 25 per cent. Although he hopes to supplement his income by building up his own freelance database and website design business, called Soft and Sound, he admits he has not made much headway so far in his one free day a week.

It is the longer term he is more worried about, in particular mortgage and pension. His mortgage is on a fixed rate of 3.89 per cent until September, when he faces a considerable hike in payments. He is repaying the loan through a number of endowments - one with Sun Alliance due to mature in 2008, and two with Norwich Union paying out in 2010. But with all the bad publicity about endowments, he is not sure whether these will produce enough to pay off his remaining mortgage.

He owns 800 Norwich Union shares (worth £3,500-£4,000), 100 shares in Abbey National, and three small (£250) holdings in Unigate, Vocalis and the Just Group. He is planning to start an investment club soon with some friends, and thinks he will contribute £50 or £60 per month.

He has been building up an occupational pension with the Teachers Pension Agency to which he has contributed 6 per cent of his salary for the past 22 years; for the past four years he has also paid £100 a month net into an AVC. He wonders if reducing his working week will limit the amount he can contribute to his AVC.

Adviser 1: Sharon Linnard

Paul's decision to reduce his hours and increase his other activities could mean not only a reduced income but additional expenses as he builds up his music and internet businesses. He is also likely to see his mortgage outgoings rise when his fixed rate expires.

If Paul finds the best option is to remain with Northern Rock on its variable rate of 7.79 per cent, the monthly cost of his mortgage will go up by about £178. So it may be best, after he has repaid his bank loan and credit card, to hold remaining money on deposit to be called upon if needed. Part of this could be held in a mini cash Isa so that interest is tax-free. Once his position is clearer, longer-term savings can be considered.

Regular savings into an equity Isa may be advisable in addition to or instead of the investment club. An Isa should offer a greater spread, so less risk.

Under the teachers' pension scheme, Paul's pension will be directly linked to his earnings: reducing his hours will therefore reduce the pension he receives when he retires. Continuing AVCs at £100 a month is unlikely to be a problem, but Paul should check this.

He could also compare the projected returns from the AVC scheme with what he would get by putting this contributions into a personal pension plan. With a personal pension, he can take part of his benefits at retirement as a tax-free lump sum, whereas AVCs must normally be taken as pension.
• Sharon Linnard works for accountant KPMG.

Adviser 2: Charles Levett-Scrivener

The rules for pension benefits are very complex for employees who initially work full-time and then go part-time. However, under rules to ensure that part-time workers are treated fairly, any period of part-time work must be converted into full-time equivalent. As Paul already has 20 years' full-time service, Inland Revenue limits will allow him to draw a full pension at normal retirement date, but things will be more complex if he takes early retirement.

There is a chance that if he continues with his current AVCs, he may end up overfunding his pension. However, the Teachers' Pension Agency would be responsible for carrying out a headroom check to confirm that he is not. Once he has actual earnings from his music and freelance work he will be able to make contributions based on the stakeholder personal pension rules.

Paul is worried that his endowments may not fully repay his mortgage. He may be pleasantly surprised with the plan that ends in 2008. Those taken out in 1990 may be more problematic, as they have not benefited much from the high returns of the 1980s.

He will receive a cash sum from his pension, which could pick up any deficit. However, there is still a good chance that if investment returns are satisfactory over the next 10 years, the plans maturing in 2010 will fully repay his mortgage.

• Charles Levett-Scrivener works for financial adviser Towry Law.

Advice is for guidance only.

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