Wealth check: What should I do about my pension?

The patient

Beverley Williams, 46, a self-employed marketing consultant, is concerned about her lack of a long-term pension. "I can afford to start saving around £300 to £500 a month, but don't know where to put this in current market conditions, and I don't have access to a company pension scheme," she says. "Should I be adding this to a pension or putting it in another investment entirely?"

The divorcee from Alton, Hampshire, is already paying 4 per cent of her salary into an AXA personal pension plan, which is currently valued at about £69,000. "But this only gives a small annual pension according to estimates," she says.

Beverley is also anxious to continue to set money aside to meet the cost of looking after her two children: Henry, 11, and Isabel, nine. "This makes my monthly expenditure pretty high," she says.

Yet with a salary of approximately £60,000 a year, she has still managed to slot away some savings for a rainy day. This includes around £10,000 in a stocks and shares individual savings account (ISA) with Prudential. "I also have about £3,500 in my basic current account which I'm not sure what to do with," she says.

For her four-bedroom house, she pays £260 a month for a £70,000 part-interest-only, part-repayment mortgage with Virgin's One Account at 3.75 per cent. There are nine years left to run. This account pools all her money into one pot, enabling Beverley to offset her salary against her mortgage debt to reduce the sum incurring interest. The property was bought in 1996 for £120,000, and is now worth about £380,000.

Fortunately, she has no other debt. "I am very glad of this in the current environment – particularly as I'm self-employed," she says. "I've never had any debt in my life other than my mortgage. I wouldn't feel comfortable with it."

For protection purposes, she pays £27 a month for her ex-husband's life cover with Scottish Provident. "This is apparently worth about £100,000 if he dies," she says.

The cure

Taking a disciplined approach by saving regular monthly sums into a pension plan is a wise move for somebody in Beverley's stage of life. "And she is debt-free aside from her mortgage, which puts her in a strong position to plan sensibly for the future," says Darius McDermott from independent financial adviser (IFA) Chelsea Financial Services.

However, with two children to look after, she should be considering other aspects of her financial planning beside retirement, such as protection, stresses our panel of IFAs.

Protection

As Beverley is a parent, a financial priority should be ensuring her children will be provided for in the event of her death or a serious illness meaning she is unable to work. "The family would really struggle if this were to happen," says Flora Maudsley-Barton from IFA Parsonage.

An income protection policy that would pay out about £2,000 a month, inflation-proofed, if she became too ill to work for six months or more would cost about £40 a month. This would pay out until Beverley retires. She could also consider a life policy for herself.

Retirement

Beverley's main concern is investing now in the hope of getting a decent income stream from her pension pot at retirement. As a starting point, she should check that the funds in the AXA pension suit her attitude to risk, and that she is happy with their performance, says Tony Catt from The IFA Centre.

"As she already has a pension in place, she could use a stocks and shares ISA to diversify her retirement investments," says Mr McDermott. "This is a more flexible arrangement which she could eventually draw an income from."

As she already has a stocks and shares ISA with Prudential, she should review this for performance and charges. However, using a fund supermarket such as Fidelity's Fund Network would give access to a diverse range of funds and providers, and offer discounts off initial charges to reduce the cost of her investments.

"She could start with two solid UK equity funds that have good track records and experienced managers, such as Invesco perpetual high income and the M&G recovery funds," says Mr McDermott. "And later build on the portfolio to get a more global exposure and a mix of asset classes."

Property

Beverley's use of an offset mortgage is a tax-efficient and effective way to pay off a loan early, says Ms Maudsley-Barton. The sums of cash flowing through the account will reduce the sum on which they pay interest, and shorten the term of the mortgage. She can also overpay and make lump-sum reductions on the mortgage when it suits her.

"An alternative strategy would be to divert some of her excess cash into reducing her mortgage as quickly as possible," says Mr Catt. "There is no investment risk in this and once she has tackled her mortgage, she can really concentrate on other investment strategies."

She has substantial equity in the house, which should afford her a level of financial security, agree the advisers. "And she should not do anything with this unless there is an emergency," adds Mr McDermott.

However, Ms Maudsley-Barton expressed concern about how Beverley will repay the interest-only half of her mortgage in nine years' time. "I would want to put in place a way to pay off that debt by the end of the term," she says.

Beverley has to find £35,000 in nine years to repay the interest-only part of her mortgage. Increasing her monthly repayments or using her pension lump sum to repay the mortgage are at the end of its term are two possible solutions, say the advisers.