Wealth Check: 'I need to get in shape for my retirement'

Brenda Hobdell, a single mum of two, is a self-employed yoga teacher and practitioner of Chinese medical massage. Now 48, Brenda is becoming concerned about her lack of retirement planning. She is considering retiring to India within the next 12 years and wonders whether it would be sensible to invest her savings in a property, either in the UK or overseas.

Brenda has £30,000 in savings with Woolwich but has so far made no specific pension provision.

We sought expert help from three independent financial advisers: Lisanne Mealing of MDM Associates, Daniela Glover of Smith & Williamson Pension Consultancy, and Alec Ruthven of AM Ruthven & Associates.

CASE NOTES

Brenda Hobdell, 48, London

Personal: Brenda is a self-employed yoga teacher and practitioner of Chinese medical massage. She earns around £22,500 a year.
Property: Renting a property in Plumstead, south-east London.
Pension: None.
Savings: £30,000 in an open-plan current account with Woolwich.
Monthly expenditure: Rent of £260, bills of £100, and food costs of £300.

PENSION

Before considering private provision, Brenda needs to find out what state benefits she has built up, says Lisanne Mealing. As a self-employed worker, she will not be entitled to benefits from the State Second Pension (S2P), but she should have been paying National Insurance contributions that will qualify her for the basic state pension.

How much she will get depends on the NI contributions she has made. She needs 39 qualifying years of NI payments - years in which she has been paying in full - to qualify for a full basic state pension. The simple way for Brenda to find out how she's doing is to apply for a free state pension forecast. The Pension Forecasting Team (0845 3000 168; www.thepensionservice.gov.uk) will be able to help.

Armed with this information, Brenda can begin to make plans about the savings she should be making towards her retirement. She must decide whether a private pension plan is the most appropriate way to save. Tax relief is available on any contributions she makes now but she will pay tax when she starts to draw an income in retirement.

If Brenda opens a personal pension, says Daniela Glover, each £100 contribution will cost her just £78. However, when Brenda comes to take her benefits, only 25 per cent of the fund can be taken as a tax-free cash lump sum - the remainder has to be taken as an income for life.

Brenda needs to take care, warns Alec Ruthven, as the Government currently has a minimum income guarantee in place for those on low incomes in retirement when resident in the UK. The basic state pension this year for a single person with full National Insurance contributions is £82.05, but the government guarantees everyone aged 60 and over an income of at least £109.45 a week if they are single. Those who are short can apply for a top-up via the Pension Credit.

But the time Brenda spends outside the UK once retired will affect her state benefits. Her savings may also reduce her Pension Credit entitlement.

SAVINGS

Brenda should make sure her savings are as tax-efficient as possible, Mealing says, by moving £3,000 - this year's annual allowance - into a cash individual savings account (ISA). The interest she gets on this money will then be free of tax. Brenda can earn 5.5 per cent a year from First Direct's cash ISA.

Rather than moving existing savings, the alternative would be to begin saving £400 a month into one of these ISAs now - assuming an average annual return of 5 per cent a year, she would have £78,456 by the time she reaches 60.

PROPERTY

Brenda rents her home in London, and Glover thinks she would find it difficult to buy a property locally, even with the £30,000 she has in savings. Based on her current income, she could expect to get a mortgage of about £79,000, not enough to buy much. She would also be faced with the prospect of a mortgage that would go on past her retirement age.

On the other hand, at age 60 she could either sell the property to release capital or let the property to generate an income, although part of any rental income would be used to cover the outstanding mortgage.

Ruthven would advise Brenda to do some research into whether she is able to purchase a property for her retirement in India and rent it out, to either pay off any borrowing needed or to build up some funds in India before her move. As for purchasing a home in the UK, in the current market she will be putting her hard-saved money at risk if the property value falls, he warns. It makes sense to keep renting.