Bloomsbury Financial Planning

George earns £51,000 a year which he uses to pay off the £85,000 mortgage on his £210,000 house as well as building up his retirement savings. He has so far accumulated £29,500 in an Additional Voluntary Contribution (AVC) scheme and is a member of a Teachers Scheme with a retirement income of £22,300. At 65 he will receive an additional annual £1,000 from a previous scheme. He hopes to retire on £20,000 and is paying around £1,000 per month into the various pension plans.

He has also saved around £31,000 in a cash Isa and savings account. At present he is continuing to allocate a portion of his salary to these savings but would like to know if this is the best place for the money.

Carlton Crabbe, senior financial planner at Paradigm Norton, says George should check with his mortgage provider in the fourth year of his five-year fix to see what the redemption penalty is.

"It could be the case that the exit penalty is lower than the interest he would pay in the final year and therefore it's worthwhile paying off his mortgage at this point," he says.

Robert Lockie, certified financial planner at Bloomsbury Financial Planning, says that although George's income can cover his mortgage, the interest of 6.05 per cent that he is paying means he needs to achieve a net return (after costs and tax) of more than 6.05 per cent on his savings to make it financially worthwhile to continue to save and retain a mortgage. This is a tall order in a lowinflation environment.

Crabbe suggests that a positive step would be to take a tax-free cash lump sum from his pensions at retirement age to pay off the mortgage. This is dependent on George continuing to fund his pensions at the current rate, which Crabbe says is a good idea.

George has questioned the strategy of taking a large cash sum from his pension as it would result in smaller annual payments, but Crabbe says it would provide him with greater flexibility.

"However, any additional money George takes from the pension will mean his guaranteed income in retirement will be lower. While he can take the additional cash and invest it to generate a return, there are no guarantees attached to this, unlike his pension payments," admits Crabbe.

Crabbe says George's aim of retiring at 60 on £20,000 a year should be possible based on his savings. If he wishes to find out what his state pension will add to his retirement income he should complete a BR19 form for a forecast of his annual pension.

Lockie says George should also give consideration to retaining a short-term contingency fund to cover unplanned emergencies. Between three and six months' expenditure is the norm, which would be £13,400 for George.

"Consider dividing assets into two notional elements," says Lockie. "A cash reserve to meet unplanned contingences (£13,400) and a long-term portfolio to meet planned objectives."

This long-term portfolio would, says Lockie, comprise the balance of George's assets - around £71,000.

"Based on stated attitude to risk, we would suggest a split of broadly 30 per cent real assets (such as equities) and 70 per cent nominal assets (such as high quality bonds) for a long-term portfolio," says Lockie.

"The high level asset mix is the most important element of portfolio construction, as the split between risky and non-risky assets is the single largest factor in accounting for the variation in returns between portfolios."

Danny Cox, chartered financial planner at Hargreaves Lansdown, says that George is in good overall financial shape. He has managed to save up a suitable pension pot and will be able to pay off his mortgage in retirement.

Although George has already set up a will, Cox recommends that he draws up an appropriate Power of Attorney, to outline who he wishes to make financial decisions for him should he become incapacitated.

Cox also suggests that, as George has no dependants, he has little use for the life assurance that his employer provides. Although he cannot opt out of this, Cox says he may wish to nominate a charity as a beneficiary rather than allow the money to be passed to his next of kin.

Cox estimates that, at 60, George would have a total annual pension of £28,534, comprising £22,307 from his teacher's pension and £6,227 from his AVCs. This will then be supplemented by almost £1,000 from his church pension when he is 65. There is therefore no need to increase his savings or take out protection from illness as, if he does fall ill, he will be able to retire early and draw on his pension.

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