Ask the experts - your questions answered - October 2006

Q I am 39. I decided to switch my mortgage to interest only - putting the money into my pension instead. I am in the 40% tax bracket and my mortgage term is 16 years. Does it make sense to put the money into my pension instead of my mortgage?

Justin Modray, Best Invest, London
A.Potentially, provided you can afford to pay off the mortgage when due. Your pension contributions benefit from 40% tax relief, so every £100 contributed costs just £60 which is very attractive. However, pensions are inflexible, you cannot access them until at least age 50 (55 from 2010) and even then you can only take 25% of the fund as a lump-sum (tax-free), the balance must be used to provide an income. Assuming you can access the pension when the mortgage is sue, will 25% of the fund be adequate to repay the mortgage? If not you’ll need to either extend the mortgage or come up with another way to repay it.

Adrian Kidd, Mint Financial Services, Lee, London
A. Doing this is a risky strategy and the one main point of consideration would be you would need to significantly invest more money into your pension as it will have to provide you with an income in retirement AND pay off the mortgage. Yes, there are tax advantages but I would need to see all your circumstance before saying if it would be advisable or not. Initially, I would not recommend this and again your investment risk attitude would be very important as if the funds do not give you the desired returns (and none are guaranteed) you could have a small pension pot with a small residual mortgage. Not great at 6-65 years of age.

Q I have £5,000 to invest - currently just residing in a high interest account - but I'd like to do a long term investment that is a little more exciting. I'd like it to be something I can enjoy seeing do well even if it doesn't make me a fortune..maybe something environment focussed? Maybe investing in a forest or something like that?

Keith Churchouse, Churchouse Financial Planning, Guilford
A. Forest investments potentially have very high rewards, but they are long term investment with the returns on your investment being realised sometimes up to 50 years later.

An alternative you could use a Maxi ISA solely for a long-term growth investment in an ethical stock market linked fund (a Stocks and Shares ISA). The ISA is a tax efficient form of saving, and if you use an online investment company you can track the progress of your investments. http://www.ethicalinvestors.co.uk/ has a directory of ethical funds.

Amanda Davidson, Baigrie Davies, London
A. Exciting investments can be the risky ones and I would not advise putting this sum in very high risk unless you have other savings that can be relied on.

It seems that you would like the investment to benefit society as well as act as an investment - that is have a good chance of growth. Why don't you consider investing in a fund that has an ethical or socially responsible investment mandate? Performance data shows you do not need to be disadvantaged and your money will be invested with companies that take corporate social responsibility seriously. EIRIS carries out research on ethical companies and UKSIF (UK social investment forum) also has data that would be useful.

Q I've already put £3,000 in an isa for this year but have about £1,000 more I want to save. Can you tell me the best place to put it. Ideally I would like instant access to my money as I don't know when I'll need it.

Keith Churchouse, Churchouse Financial Planning, Guilford
A. If you’re interested in having a bit of fun with this money, try Premium Bonds as the winnings are tax free. You can cash in all or part of your Bonds at any time, and the money is transferred to your bank account or building society within 8 days of receiving your encashment form. See http://www.nsandi.co.uk/products/pb/index.jsp for more information.

If you are uncomfortable with this then I would suggest an internet bank as invariably they offer higher rates of interest. The rates available can be checked on http://www.fsa.gov.uk/tables

Amanda Davidson, Baigrie Davies, London
A. If you would like instant access then you should keep the money in a cash account. Having taken up your ISA allowance then other deposit accounts are where the money should be saved. Online accounts usually offer better rates of interest. Try www.abbey.com or www.northernrock.co.uk both accounts giving over 5% gross at time of writing - but that includes a bonus for a few months.

Q I'm thinking of buying a new car but don't have a spotless credit record - would I be better off with dealer finance or a loan and what kind of rate of interest should I expect to pay. I want to get the cheapest deal I can.

Justin Modray, Best Invest, London
A. The rate of interest you’ll pay depends on the extent your credit record has been damaged. Initially you should check that your credit rating does not contain errors, you can do so free of charge at CreditExpert or www.annualcreditreport.co.uk. Then shop around for the best deal, comparing dealer quotes with banks and other specialist lenders. A quick search on the web reveals plenty of companies who will search for you, although it’s always worth asking how many loan providers they represent and compare at least two such companies.

Daniel Clayden, Clayden Associates, Devon
A. I found a recent article stating ‘Choosing to use dealer finance instead of arranging your own loan when buying a car can see motorists spend more than £3,000 too much.’ – does this answer your question? The fact that you don’t have a spotless credit record shouldn’t force you down the road of dealer finance for your new car. Currently, the average interest rate charged for people taking finance packages from showrooms is 11.3% APR. This is far higher than some of the cheaper personal loans available (even from lenders who will consider applicants with CCJ’s). To give an example, the difference in the cost of credit on a £10,000 loan over 4 years between an APR of 6.9% and 10.9% is £839.04.

Q I've just changed jobs how can I find out whether I am better off moving my pension to my new employer or leaving it where it is? I was only in my previous job for around 3 years so it is not very much money - and it was in a group personal pension rather than a final salary scheme.

Justin Modray, Best Invest, London
A. If there is no transfer penalty for moving it across to your new scheme then consider doing so, it will make life simpler. You just need to ensure that your new scheme offers a good investment choice and competitive charges, as there’s no point moving the money if it means going from a good scheme into a bad one.

Adrian Kidd, Mint Financial Services, Lee, London
A. Get a pensions IFA to look into this for you. He/she would need authority to talk on your behalf on the account. They can get projections to see what the pension would potentially provide and then research the market to see if a transfer is viable. If the pension could be worth more by moving, then it could be transferred subject to other criteria being met. If it would be worth less it is unlikely that it is a good idea to move it. Several factors such as charging structures, fund choices and performance and provider strength would need to be examined. If it’s a recent contract it should be fairly competitive and is more than likely a Group Stakeholder contract.