You are not rich because of how much cash you have, you are rich because of how little debt you have!

By Nick Ingram

I’m giving thought to the way people should now view the way they look at a lifetimes financial planning.

A generation ago, things were very much simpler. I do not hold with the theory that when, in the 50s and 60s, when average salary was less that £1,000 pa and a three bed semi cost £4,000 it was just as hard as it is now – it was not, it was a breeze then!

Today we face something that could not even have been considered a generation ago, and that is unprecedented life expectancy.

My daughter was born in November 1999 and will be 7 years old this November. Because of the times she was born in, her life expectancy is going to be in excess of 100 years, probably nearer 110 years. For me, born in 1959, my life expectancy is expected to be nearer 95 years than the 85 years that it is if I was old today.

Blimey!

The problems that we now face are unique to the times we live in, and it is this that I want to address in this piece here.

Picture a reasonably well earning individual or couple. All their lives they have traded up – work is better paid, holidays are better and where we live is getting better and more expensive all the time. You arrive in your mid/late 30s feeling like you are still in your 20s, enjoying a great lifestyle and career prospects. You think you might just push for one more property and away you go with a brand new £400,000 mortgage of a £600,000 property. Bingo, you have arrived!

Did you read your mortgage illustration properly though? No? You should. You will see that amongst some of the less relevant information is the total amount repayable for enjoying this mortgage. Did you notice it? No? Get it out, read it now.

Although not an exact figure (mortgage interest rates are notoriously fickle), you will see that the total mortgage you will repay, after all the interest has been compounded up, will cost in the region of £1.79 in the pound. Your £400,000 mortgage that you have worked so hard for and deserve, will cost you about £716,000 to repay over 25 years. Bloody hell!

You are in your mid 30s, 25 years from now you will be near your early 60s and, if lucky, you will just have paid off that mortgage. Now, given that the £716,000 you have paid comes out of taxed earnings, how much in addition did you put aside for your income in the huge retirement you are going to face?

It was quite easy for my Father. Born in 1930 and educated until National Service in 1952. Worked from 1954 until 1994, Retired then until his death in 1998.

Bit of a short time in retirement, but he only died 4 years short of the average mortality of a man of his generation.

For me, it goes like this: Born 1959, educated until 1980. Work until 2024 (aged 65) live another 20 years perhaps to 85/86. My percentages work out as follows: Educated for 20% of my life expectancy, work for 40% of my life expectancy. Retired for 20% of my life expectancy.

With the size of mortgage I have to pay off, the lifestyle that I want to enjoy now, and the length of my expected retirement, how am I going to afford to pay for it all?

I’m not, so I have decided that I am going to ignore my pension planning, crash as much money into my mortgage that I can, and hopefully be debt-free long before retirement. Then, in retirement and for the rest of my life, I am going to gradually increase the debt against my estate by borrowing as I need to off my house.

This will achieve a couple of things that will be of benefit to me and my family.

• Inheritance Tax (IHT) is paid on the net value of my estate, which, hopefully, will be mortgaged to the hilt at the time of my death.

• If I need long-term care, I will be further away from the means tested threshold at the time of my illness.

• I can enjoy my lifestyle now, and in retirement because I chose to drive down debt, rather than drive up savings/investment into a pension (whose income is taxed anyway).

• The value of my house (historically) will still double in value every 10-years.

What about my poor daughter you say, what will you leave for her? I’ll tell you. Since she was 2 years old, she has had her own pension. I pay the Child Allowance into it. After tax relief is added to the contribution and growth is extrapolated (almost tax free) until her age 60 at 7%, the fund is projected to be £1,300,000.

Quite enough for her, given that she can alter the investment amount over her working life after I hand responsibility for it over to her after her education has ended. She will also inherit a house asset with, hopefully, just a little bit left for her, currently £285,000 which is below today’s IHT threshold.

Nick Ingram is a Director of Barton Hatcher Ingram Financial Management Ltd