What the panel advise: Nick Bamford

We asked Nick Bamford, Director of IFA Informed Choice what he would have advised the mystery shopper to do. He said:

"Based on the information provided in the mystery shopper synopsis but of course without the benefit of meeting him and asking a lot more questions, I would advise the following:

He should seriously consider paying off the mortgage.

The advantages I see are reducing monthly outgoings; and there is always the non-financially quantifiable benefit of getting rid of the mortgage, put simply, that must feel good.

Leave a modest amount outstanding, so that the lender is responsible for the retention of the deeds. This will save him having to pay for them to be kept secure.

He might then save or invest his monthly savings for the future.

If he is serious about retiring in two to seven years, paying off the mortgage makes great sense. He would not want to have that outstanding in retirement.

As a "cautious investor", to achieve an investment return greater than that charged in interest on his mortgage debt, will require him to expose his capital to some degree of risk which may not be acceptable.

He should consider how long he wishes to invest for and the degree of volatility he is prepared to accept.

He does not wish to lose his mother's money.

Any asset class other than cash carries a risk of capital erosion.

He should consider some fixed-interest investments, but these do carry some risk to capital and interest. In the case of corporate bonds the issuer, usually a company, might default on payment of interest or capital.

Gilts (govt bonds) are mostly priced above their par, or redemption value, and whilst there is little risk to the payment of interest or capital - after all, they are backed by the government - if Mr X was to buy a gilt today at £133.54 (Treasury 8% 2021), he will only get back £100 when it is redeemed in 2021.

He and Mrs X should definitely exploit the cash Isa allowances for 2003/04.

At the time of the exercise they could have exploited the 2002/03 cash Isa allowances as well.

The mini-cash Isa allowance for both of them is £3000 each for each tax year.

They then could have exploited mini-equity Isa allowances of £3000 each for each tax year.

In this context, mini-equity Isa also encompasses fixed-interest. The benefits of this are - of course - no income tax to pay on any interest earned.

She is not a taxpayer. He pays 40%. Subject to the usual warnings about marriage breakdown, deposit monies should be moved into her name to get rid of the tax liability on the accruing interest.

I am also concerned about how much income Mr X is going to get from his pension scheme.

He thinks he can retire at 55 without early retirement penalties.

I think that unlikely, and we need to check that out.

Assuming he is in a 1/60th scheme, I estimate his pension at 55 to be 20/60ths of his final salary in today's terms.

Assuming no early retirement penalty, 25/60ths at age 60, based on today's salary. That is £15,000 and £18,750 respectively.

Is that enough?

He might consider topping up his pension with an Additional Voluntary Contribution plan, and gain 40% income tax relief against his contributions.

Mrs X might also set up a stakeholder pension plan, and even though she is a non-taxpayer benefit from 22% tax relief.

We do not know Mr X's views about inheritance tax planning and long-term care issues so we would need to explore that with him.

Mr and Mrs X should set up wills if they have not already done so.

The biggest issue is the definition of Mr X's attitude to investment risk / reward and volatility.

He is nervous about the current state of the stock market.

He does not want to lose money. He is looking for growth, not income currently.

And yet on a scale of 1-10 he sees himself in the middle.

That is not a place to be for someone who does not wish to take any risk.

Mr X needs to have an understanding of the risks and possible rewards of various asset classes, cash, fixed-interest, property and shares.

When he understands how they work, he may feel more comfortable investing some of his capital in shares.

First thoughts might be to invest his capital after paying off his mortgage as follows:

40% cash

20% fixed-interest

25% commercial property

15% shares

The latter three through collective investments to spread the risk further.

As ever, Mr X needs to define very clearly what his requirements are.

No adviser will be able to give him best advice unless he has clear intentions."

BBC Radio 4's Money Box Investigates was broadcast on Tuesday, 22 April, 2003 at 2000 BST.