Wealth check: Help me retire and pay off mortgage by 2015

Pam Robinson is 66 and still weighed down by a home loan but has little in savings. How can she get out of debt and into a more comfortable retirement?

The patient

At 66, you might expect Pam Robinson, a former biomedical scientist from Daventry, to be sitting back and enjoying retirement. But with plans to remarry next year, and pay off her mortgage by 2015, she has begun a new career as a care worker to supplement her retirement income.

"I need advice because I'm currently engaged and want to move in with my fiancé Glen," Pam says. "My main goal is to be mortgage free by 2015, and although I had retired from my job in a hospital laboratory, I'm now a personal assistant to a disabled lady and work with adults with learning difficulties."

Pam now plans finally to retire at 70, but she finds that her monthly income of about £2,000 doesn't always cover her monthly expenditure, and with such big plans on the horizon she needs to address her financial situation as a matter of urgency.

Our panel of three expert independent financial advisers offers solutions for Pam's money worries.

The cure

Pam's main problem is that almost half of her monthly income is spent on paying off debts on her mortgage and credit cards. And with unexpected costs like car repairs, she often incurs bank charges of £25 a month.

"This leaves no spare money to build savings to ease her into retirement and cope with extra spending," says Danny Cox of independent financial adviser Hargreaves Lansdown. "Pam hopes to stop work at age 70 and to have paid off her mortgage by 2015 when she is 72. But it is not clear how she expects to do this. From the level of interest that Pam is paying it would suggest she has a £120,000 interest-only mortgage, but with no plan to repay the capital."

If Pam has any hope of reaching her goals she needs to focus on bringing down her debts and building up her savings as quickly as possible.

Savings and budgeting

Pam owes about £1,160 on credit cards, and pays upwards of 17 per cent a year in interest on this debt. She could use her £1,200 savings to clear her balance and save herself the £250 she spends every month in repayments. Cash savings currently earn very low levels of interest, only 2 or 3 per cent at best, and this move would free up extra cash to help to pay off her mortgage. But this will leave her with no savings and no emergency financial buffer.

Alternatively, Pam could switch her debt to a 0 per cent offer until she can finish paying off the debt from her income, although she should be aware of transfer fees of 2 or 3 per cent of the debt. But overall, Pam needs to focus on her monthly spending to try to bring down her mortgage debt and save money. "When you're living on a limited income it is very important to ensure that every penny goes as far as possible," says Philip Pearson of independent financial adviser P and P Invest. "Pam really must work to a monthly budget to reduce the problem of overspending and incurring charges. She could try keeping a diary for a month to record every penny she spends every day to highlight exactly where her money is going and where savings can be made." Several online tools such as www.whostolemymoney. co.uk also offer this service, and include interest calculations and spending analysis tools to help to work out typical spending patterns.

Meanwhile, Pam also wishes finally to stop working in four years' time – at 70, but the experts feel that this has little chance of happening until she can start putting money away. With Pam's monthly income of £2,000 made up of both her pension and earnings, she is likely to see a significant drop when she stops working as a carer. Her disposable monthly income is currently used to pay off debts, but she must create a savings pot to help to look after her in older age. Setting up a regular saving by direct debit would help to promote disciplined saving, and Halifax, RBS and NatWest all have fixed-rate regular savings accounts offering 5 per cent interest for 12 months.

Mortgages

Pam's mortgage is interest only, so she is paying back only the cost of the loan each month, not the loan itself. In fact, her current mortgage means she will be 72 when it runs out, with no way to repay the capital borrowed. Not only is this a bemusing decision for her lender to have made because of Pam's age, but it also will certainly have to change if she hopes ever to own her home outright. Our panel of independent advisers are all concerned by this situation and urge Pam to change her mortgage to a repayment arrangement.

"Pam already tries to use any extra cash to pay off the capital on her mortgage, and with the £250 saving from credit card repayments and £25 per month in bank charges, £275 a month can be diverted to repay more," adds Mr Cox. But even then, Pam would be reducing the capital she owes only by £3,300 a year."

Insurance and wills

Pam has a policy to cover time off work for sickness or accidental injury, a life policy on her home to cover her mortgage, and a policy that will pay out for funeral expenses. But the advisers are concerned that Pam is clear about what her insurances cover and at what price, particularly as some of her plans will cease at age 70.

"Pam's illness cover and life insurance plans to cover her mortgage and to make a payment to her son are likely to be expensive," says Mr Cox. "She probably has about £70,000 equity in her property that can be used to cover funeral plans and a legacy for her son. It is understandable that Pam wants to pass on her home and use her life insurance to pay for costs instead, but it is not a necessity in this situation and the saving on the premiums could be used to help to repay debt."

"Funeral insurance plans are rarely good value unless, of course, you die early in the policy life," adds Dennis Hall of independent financial adviser Yellowtail, who notes that those who live for many years will often pay far more in monthly premiums than would be paid out on their death. "If Pam can do without this expenditure it is yet more that can be used to repay debt."

And all three advisers agree that Pam really should make a will as a matter of urgency. "If she wants her fiancé to benefit when she dies she needs to make a will. It is worth remembering, though, that marriage revokes a will, so any will made must either be renewed on marriage or made in light of marriage plans," Mr Hall says.

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Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk