Two years ago Steve Cheshire, 46, hatched a plan. He decided that he wanted to retire at 55 and began planning his finances with that in mind. However, he is worried that his plans may come unstuck because his finances have taken a battering.

One of his three pension pots has fallen in value by almost £10,000 since June last year. To make matters worse he was made redundant in August from his £85,000-a-year job as head of operations at a telecoms company. He had been there for two and a half years.

Steve lives in Nottinghamshire with his partner, Suzie, 36, and their two children Freddie, 3, and Amber, 1. He also has a son from a previous relationship, Oliver, who lives with his mother in Cardiff. Steve says: “I want to spend as much time with the kids as I can as they grow up, so I would like to finish work at 55, or as close to that age as possible. My biggest worries are annuity rates at the moment and putting too much money into a pension for dwindling returns.”

He is aiming to build up a pension fund of £700,000 to give an income of £40,000 a year. To achieve this, Steve upped his personal pension payments this year to £2,500 a month. He has frozen the additional £2,500 payments since August, when he was made redundant, but intends to backdate that with a lump sum when he starts work again.

He has three pension pots: a final- salary pension worth £1,500 a year and two money-purchase pensions, one valued at £115,000, which was worth £124,000 in June 2008, and another worth £75,000. He says: “Annuity rates seem to be shrinking to an almost insignificant level, so am I wasting my money despite the generous tax benefits? At a current rate of about £6,000 per £100,000 pension, annuity rates look OK, but if they were to fall significantly in the next ten years, I might regret my decision. Should I diversify out of pensions, and what are my options? Property?”

Steve and Suzie moved into their three-bedroom house in a Nottinghamshire village seven years ago, when they met working for Capital One. Suzie now works part-time and supplements her income by trading on eBay. They hope to get married next year. The house is worth £220,000 and they have a mortgage of £80,000 with Nationwide fixed at 6.18 per cent. They are in year three of the five-year fixed term and pay £640 a month.

Steve would like to have the mortgage paid off by the time he retires. He says they could also do with another bedroom, and are considering extending the house, or moving. He is hunting for a job and has set up a private limited company to market himself as an interim manager, in preparation for a turn in market conditions.

He is applying for contact centre managerial positions and remains optimistic that he will be re-employed soon. “Things are starting to pick up,” he says. “I have several interviews over the next few weeks.”

He has £45,000 of savings, £11,000 of which is in equities in a Barclays stockbroking account. “The recent rise in the stock markets has helped since being made redundant. I need around £2,000 a month to cover expenses,” Steve says. The remaining £34,000 is in a poorly paying instant-access Nationwide internet account. Since the dramatic Bank of England base rate cuts over the past year, he gets returns of only 0.45 per cent on his money.

On top of the £640 a month mortgage payments, Steve and Suzie pay about £140 a month council tax, £100 for their phone, Sky, broadband and water bills, and £200 for a childminder. Steve also gives £300 a month to Oliver’s mother. Any other expenses, such as holidays, come out of Steve’s savings, as well as the £132 a month child allowance, and £278 job seekers allowance, that he is currently receiving.

Steve Cheshire and Suzie Nixon: What the experts say

Financial planning 1

Simon Reynolds and Geraint Jones

FW Stephens

“As Steve is planning to retire at such a young age he should consider the cost of ensuring that his retirement income increases annually otherwise it will be eroded by inflation. This may mean that Steve needs to save more than he first thought; a later retirement age target is more realistic.

“Hopefully, though, Steve’s new company is successful and he can afford to invest more. Pensions would appear the best option for saving but he could also use investment Isas so that he can access the funds whenever he wishes.

“It is also important that Steve and Suzie make a will and check that they will benefit from each other’s pensions and life cover if either were to die.

“Steve and Suzie could improve returns by switching accounts and using cash Isa allowances, as the interest paid is tax-free (£3,600 maximum each for 2009-10, increasing to £5,100 each for 2010-11). The best rates for cash deposits and cash Isas can be found using comparison websites such as moneysupermarket.com, which quotes First Direct as offering 3 per cent AER (annual equivalent rate) variable gross for cash Isas, and Citibank as offering 3.30 per cent AER variable gross for instant access deposits.

“There are a number of taxation issues they should also think about. Steve has established a limited company to market himself as an interim manager. This appears to be what HM Revenue & Customs call a personal service company and as a result Revenue might apply a punitive tax regime under what is known as IR35.”

Action plan

- Save more or retire later.

- Switch accounts and use cash Isas.

- Check whether they have arranged their affairs in a tax-efficient way.

Pensions

Rob Borrill

Pearson Jones

“Steve is focused on retirement, but I believe that first he should concentrate on ensuring that his family is financially secure if he falls ill or dies. He will have lost death-in- service benefits when he was made redundant, which he should consider replacing as soon as possible.

“He may have to consider lowering his income requirements or delaying retirement. His deferred final-salary scheme benefits are more than likely payable at age 65, so at 55 he should expect a reduction of about 40 per cent in its value. He has concerns about buying annuities, but this is not the only option to provide income. He could use unsecured income, better known as drawdown. Under this option, the fund is not handed over to an insurer but retained under his control. The drawdown fund can be used to provide an income.

“There is a trade-off for the added flexibility: investment returns may not be sufficient to provide the income he requires. Steve also proposed property as an alternative to a pension. This has historically been a valuable investment, however, Steve would initially need a deposit, which could wipe out his short-term cash reserve.”

Action plan

- Consider an income drawdown pension.

- Determine whether investing in property is financially viable.

Financial planning 2

Geoff Tresman

Punter Southall

“Steve wants to pay £2,500 a month into a pension. As he has only just set up his own business, it may be that much of the contribution will not be relieved against 40 per cent tax. He should check with his accountant to make sure that he qualifies for the higher rate of tax relief on any contribution he makes. It may be more appropriate for him to wait to the end of the tax year before deciding on what level of pension contribution to make.

“With regard to the two money purchase pension schemes, I would recommend that he seeks advice on how best to consolidate these and consider investment options.

“Turning to the mortgage, Suzie and Steve should check when their fixed rate runs out and seek independent advice to ensure that they remortgage at the most competitive deal. Irrespective of where the best rates are, it is likely that the market is going to become more competitive and the potential for getting a better deal from another lender is high.

“It may well be sensible to look to use some of their savings to repay the mortgage in two years time at the end of the five-year fixed deal. In summary, if they are serious about wanting to retire when Steve is 55, they should look to build capital, reduce the debt and make sure that their pensions work as hard for them as possible.”

Action plan

- Check tax position of pension.

- Consolidate money purchase pension schemes.

- Look to use some of their savings to repay the mortgage.

Steve’s response: ‘Changing my savings into Isas is good advice’

“The advisers confirm that I have been thinking largely along the right lines, but I still have a few things to consider.

“I shall act on the advice to change my savings into Isas. For example, I had overlooked the possibility of using Suzie’s Isa allowance to maximise our savings and I intend to do that as soon as I can. I will also look into overpaying the mortgage. Once I get a new job I may reduce my pension payments to £2,000 a month and use the other £500 towards overpaying the mortgage. Nationwide will let me do that.

“I haven’t given up on my wish to retire at 55, but I realise it might be a bit of stretch — 58 may be more realistic. I purposely set the 55 target so that I had a good chance of getting there before 60.

“I was particularly happy with the comprehensive pension advice from Rob Borrill. I don’t totally understand all the details of a drawdown pension and I intend to pursue further advice. I am already considering moving some of my £45,000 savings to boost my pension once I am re-employed.”