A pension can seem just one more expense

We asked our experts to help one young couple to save money to improve their home.

The reader
Rebecca Hilton works as a research scientist, lives in Redditch, Worcestershire. She needs a piece of advice on saving finances for improvement of the home she has bought earlier this year. The great advantage of the situation is that both she and her partner, Stuart, love DIY.

According to Rebecca, they have planned the redecoration of their home to details. In the nearest future, they want to install a new bathroom and redecorate the office, adding fitting shelves and renewing the room. According to their estimates, the bathroom will cost them about £800 and the office – about £500. They also plan to remove the old wallpapers and make a full redecoration of the stairs, landing, and hallway. The further plans include replacing the double glazing and redecoration/extension of the kitchen.

These plans go for a 3-5-year term, and all the redecorations still need finances to be found for.

“We have no idea what to expect because we are inexperienced with this sort of thing,” Rebecca says.

“We understand the importance of ‘getting it done right’ and do not want to make costly mistakes. Stuart and I expect to use a combination of our savings and a loan from our mortgage company to pay for the improvements.”

The couple, both 30, bought their three-bedroom house for £225,000 in July 2016 and have a Skipton Building Society repayment mortgage of £185,000. They are keen to increase the house’s value and to add some freshness and personal touches. Their loan is on a fixed rate of 1.89 per cent, which expires on April 30, 2018.

Rebecca says: “I used a local independent mortgage broker, who gave me great advice, not just for mortgage products, but also about the buying process and what to expect.

“One regret I have with the house purchase is that we were putting in offers in January 2016, so I thought it would not be worth opening a first-time buyer Isa. But in the end it took six months between the offer being accepted and completion. In short, I missed out on six months’ benefit of this great scheme.”

The couple realise the high costs of making the kind of enhancements they would like. Their joint income is £48,500; their monthly mortgage repayment is £684 and other typical outgoings are about £1,000.

Rebecca has a workplace pension, into which she pays £60 a month. She keeps about £500 in her current account and has approximately £3,000 in a regular saver account with First Direct and the same amount in a Coventry Building Society Isa.

When she isn’t busy with her research work investigating new methods of pest control, Rebecca likes to make the most of her time off, mountain biking, gardening and doting over their Maine coon cats, Mylo and Skye.

“We would love to be able to save and still enjoy a holiday each year, and go on more short breaks in the UK,” says Rebecca. “We value our spare time together and hope the hard work at the start of our careers will reward us with a good work-life balance later and a comfortable retirement.”

Rebecca and Stuart spent £5,000 on Rebecca’s credit card to buy a sofa, bed, dining table and mountain bikes. It has a promotional rate of 0 per cent, which ends in September 2019.

The experts’ advice

Helen Howcroft, managing director, Equanimity IFA
“It would be sensible for Rebecca and her boyfriend to start saving for their renovations now based on the likely cost of the works. A regular savings account is a good place for saving for at least 12 months because they generally earn a high rate of interest. They could consider saving in other high-interest accounts, such as TSB, which does not have any tie-in period.

“They have a £5,000 credit card debt which is interest-free for another few years. They should set money aside each month to enable them to clear this debt in 2019. To accumulate £5,000 in September 2019 Rebecca would need to set aside £142 a month, assuming a 3 per cent rate of interest. It would be sensible for Rebecca to have a budget planner to track expenditure. Their overall level of savings is quite modest, which indicates that they spend a large proportion of their income. Setting a budget can provide discipline to enable them to save.

“Rebecca is saving a modest amount of money into her pension, which is unlikely to be sufficient to meet her retirement savings needs. The Money Advice Service has an online calculator that allows you to work out how much you need to save. Assuming that Rebecca wants to retire at 68, which is in line with the current state pension age, she would need to be saving 20 per cent of her income annually towards her retirement needs.”

Andrew Lawrence, mortgage broker at SPF Private Clients
“Rebecca and Stuart should consider withdrawing from Rebecca’s ISA the £1,300 required to install a bathroom and renovate their office. The other option is to remortgage, which may incur early repayment charges, or take a further advance, which would give them two products with different end dates.

“If they do not increase their monthly outgoings, they can continue to save until their mortgage deal expires on April 30, 2018. At that point they can approach a lender about the option of increasing their mortgage to allow them the funds to complete the home improvements without incurring charges, and keeping the mortgage debt on one product. They could also consider increasing the mortgage to pay off outstanding debt on their Virgin credit card, but it may be more cost-effective simply to transfer the balance to another 0 per cent interest deal.”

Dennis Hall, chief executive, Yellowtail Financial Planning
“According to the Halifax, the average age of the first-time buyer is 30, so Rebecca is right on target. First Direct has recently dropped its savings accounts rates, and although her current saver account pays 6 per cent, if she renews her monthly commitment the rate drops to 5 per cent — it’s competitive, but a drop all the same. She should be aware there is a fixed 12-month commitment; any withdrawals and the rate falls to 0.05 per cent. If she wants to use the money for home improvements, she should wait until the plan matures.

“In the long term the real issue is pensions, and £60 a month is not sufficient. I realise there are all kinds of pressures on income, but as a minimum the amount going into a pension ought to be nearer 10 per cent of salary — and that’s gross salary. For every year you delay making that level of contribution, the shortfall gets bigger. If Rebecca can commit now to forgoing future pay rises and allocating these straight into pension contributions, it’ll feel less painful — or so the psychologists say.”

Rebecca’s response
“The comments are so helpful, and have brought home the importance of saving into a pension. At this stage in my life it’s really easy to see pension contributions as just another expense. We may be years off retiring, but we don’t want the big day to creep up on us and catch us unawares.

“We definitely need to think about our savings and will deal with this. We just want to find a savings account with a decent rate and we’ll shift our money around as and when one comes up.”