Wealth Check: How do I pay off my debts without access to more loans?

In October 2005, HM Revenue & Customs surprised Antonio by telling him his tax returns were faulty due to his accountant's negligence and he owned them £20,000. He then decided to take a secure loan to pay in full his debt. Now, he has no more credits and cannot get anymore loans.

Antonio's main concern is how to manage his debts. At the moment he rents out two rooms of his house and his flat. He relies on his bank overdrafts on emergency situations and do not have any savings.

He sees himself as an entrepreneur and says he loves so much what he does that his biggest challenge is actually to be able to stop working. He can't really see himself retiring but just enjoying life as it goes on. However, he says that if I didn't have a mortgage, retiring with a £1,000 monthly income would be enough, but £2,000 would be ideal.

Antonio used to pay in for a private retirement plan but stopped it some years ago and now prefers to invest in property. He has two life insurance policies; one is related to a secure loan. Antonio used to pay endowment on his properties but when he decided to cash in, he says he lost almost a third of the investment.

We asked three financial advisers to look at Antonio's position: Rebecca Taylor of Dunham Financial Ltd; Ben Yearsley of Hargreaves Lansdown and Alex Pegley of Calculis Ltd.

Case notes

Antonio Silva, 50, IT co-ordinator, London

Salary: £50,000 to £70,000
Mortgage: two mortgages
Pensions: none
Savings: none

Expenses: £400 in food and transport each month, and £420 in credit-card debts. Antonio has been the IT co-ordinator at the Brazilian Embassy for the past seven years. He is also a freelance IT consultant for TV Globo (Brazil's biggest television channel), where he was an employee for nearly eight years. He has two mortgages totalling £447,300 plus loans and credit-card debts of £72,250. Antonio pays about £420 in interest on his credit cards alone is a month

Tax

Alex Pegley says Antonio tax situation must be resolved before any other issues. He recommends that Antonio finds himself a new accountant. And if he's unfamiliar with how the tax system works, he could appoint an independent financial adviser to be his liaison between a new accountant and the Inland Revenue, though this will cost. For Danny Cox, Antonio has already taken steps to invest for the future through buy-to-let property, his income is sufficient for his needs, and his freelance work should increase his income when needed. He also recommends that despite his previous bad experience, the use of an accountant to help him avoid problems in the future.

Financial planning

In Rebecca Taylor's opinion, Antonio needs to do some serious planning on how to become financially independent. She agrees both of his mortgages are at reasonable rates, but is concerned about them being interest-only and that they both extend beyond age 65. She says that at some point he'll need to repay them to be able to enjoy a life without a mortgage commitment.

Rebecca says that regardless of Antonio's desire to go on working, there is a great difference between those who can afford to stop working, those that choose not to, and those that work because they have to. So, she recommends he should invest in a portfolio of investments, to be used in conjunction with a retirement plan, whether this comprises a pension plan, ISAs or Unit Trusts.

Danny Cox suggests that he use the tax efficiency of a pension plan to provide additional savings and diversification away from property. He says that for every £100 he saves in a pension fund, it will cost him just £78 once the tax saving has been taken into account, and if he ever runs into higher rates of tax, further relief will means net costs of £60. He could invest in a socially responsible investment fund in accordance with his views.

Emergency savings

For Pegley, Antonio's largest single asset is probably his future earning capacity, and recommends that he put in place some income protection to cover this, should he be unable to work for a protracted period of time through sickness.

Cox says that an income protection policy could solve the issue, but care is needed when choosing which one to go for.

An emergency cash fund to help with any unexpected expenses, typically equal to three months expenditure, is Taylor's suggestion.

She says mini-cash individual savings accounts (ISAs) generally pay a higher rate of interest than most cash accounts, and the interest is tax free. Individuals can pay a maximum of £3,000 into one of these accounts in any tax year.

One of the highest-paying ISAs currently on offer is from the Tipton and Coseley building society, which pays 6.15 per cent.

However, there is a high minimum investment of £3,000, and it also includes a 0.35 percentage-point bonus for six months.

Furthermore, it is a notice account, meaning that anyone wishing to withdraw their cash from these accounts is required to give 30 days' notice to get access to their money.

Elsewhere, National Savings and Investments is paying 6.05 per cent interest on its Premier ISA, on balances of just £1. All three advisers are concerned that Antonio's debts come with expensive interest rates and add that with recent interest-rate rises they are likely to increase. They recommend he clears the non-mortgage debt as a matter of urgency and structures his repayments, but also that he consider looking at 0 per cent interest offers for as much of this as possible.

For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS; cash@independent.co.uk