Five years ago Hilary Tarleton embarked on a dramatic career move. Hilary, now
43, decided to leave her well-paid job in financial services to retrain as a
painter.
She now works an average of four days a week painting furniture in people's
homes, which allows her more time to spend playing golf. But there is a
downside. Hilary says: “When I first made the switch my income dropped
overnight, from £55,000 plus bonuses to zero.”
Now, after four years as a selfemployed decorative artist, Hilary's finances
are on a slightly more even keel - and her golf handicap is down to ten. She
currently earns about £25,000 a year and has a modest pension from her
previous job. She lives with her partner in a £450,000 Edwardian
semi-detached house on the outskirts of Manchester.
Hilary jokes that her main worry at the moment is to reduce her golf handicap,
but she also has a few financial dilemmas to mull over. To start with, the
£75,000 mortgage on her home will not be paid off until 2020, by which time
she will be 55. Hilary says: “I would like to clear the mortgage sooner than
that. If I can afford to, I would also like to buy a second property,
renovate it and then sell it.”
An endowment policy worth £48,000 will mature in four years, leaving Hilary
and her partner with only £27,000 to pay on their Woolwich Lifetime Tracker
mortgage, which currently charges 5.29 per cent. Hilary pays half the
monthly mortgage repayments, which means that she is shelling out about £275 a
month.
When she retires, Hilary will gain access to 17 years of benefits from the
final-salary pension scheme of Aviva, the insurer, her former employer. She
estimates that her pension would be worth £13,000 at her normal retirement
age of 62, though this will be revised upwards in line with inflation. Now
that she is self-employed, Hilary asks: “Do I need to add to this pension
provision, and if so, how much can I afford to contribute?”
She has a fairly sizeable savings nest egg but is unsure whether she has the
right mix of deposit accounts and equity investments. She has a number of
cash Isas, including £15,000 in a Nationwide Members' Isa Bond, currently
paying 5.15 per cent, which she is in the process of transferring to an
Icesave Easy Access Isa, paying 6.1 per cent. She also has £3,200 in an
National Savings & Investments Direct Isa, paying 5.3 per cent, and
saves £100 a month in an ING Direct Cash Isa, which started at 5.6 per cent,
reverting to 5.25 per cent after six months. She has £1,600 in this account.
Hilary reckons that she could probably save an additional £200 a month and is
prepared to tolerate a reasonable degree of risk with her investments. She
also has two holdings in Peps: the Norwich Union Income & Growth Fund,
which is now worth £7,900, and the Jupiter UK Growth Fund, which is worth
£11,600. She holds £17,000 of shares in Aviva, £650 in Rolls-Royce and
£1,700 in an Indonesian goldmine.
She asks: “Am I making the most of this money or would a different portfolio
of investments produce better results?”
Hilary Tarleton: what the experts say
Savings & Investment
Dennis Hall, Yellowtail Financial Plannning
“Anyone not taking professional advice should understand their risk tolerance.
Doing so might have persuaded Hilary to avoid the Indonesian goldmine
investment.
“Hilary's savings and investments are split 66 per cent equities and 34
per cent cash, which we consider moderately adventurous. She should look to
diversify her portfolio by looking at funds providing exposure to additional
asset classes. This does not necessarily produce higher returns, but it
avoids having all her eggs in one basket in falling markets.
“Funds offering additional diversity include Cazenove's Multi-Manager
Diversity Fund and Seven Investment Management's AAP (asset allocated
passives) funds. These offer exposure to a whole range of assets, from
commodities to private equity, but use tracker-type exchange-traded funds to
bring down the costs.
“Hilary should consider selling her holdings in Aviva and Rolls-Royce
and reinvesting the money in diversified funds. To be fair, neither has
performed badly over the past three and five years, but in each case the
risk is concentrated in a single share.
“Capital gains tax might also be a concern and this should be checked before
making any decisions.
“The transfer of savings cash from Nationwide to Icesave will produce better
returns, but she should watch the rates as they could move downward. The
National Savings & Investments rates are also poor and she should
consider switching.”
Action plan
Take steps to understand her tolerance to investment risk and then invest
accordingly.
Diversify her portfolio and do not necessarily increase exposure to equities.
Pensions
Danny Cox, Hargreaves Lansdown
“Hilary's Aviva pension provides a good bedrock for her retirement income, but
she would be well advised to make additional pension provision.
“Hilary should also check her entitlement to state pensions at
www.thepensionservice.gov.uk. A full basic state pension entitlement is
achieved with a full employment history. Being self-employed should not
prevent this, provided that Hilary maintains her national insurance
contributions. The state pension will be paid from age 65.
“In the meantime, she should think about saving more for her retirement. If
she saves £200 a month in a personal pension, this will be ‘grossed up' to
£250 a month because of the tax relief on the contribution. This amount
might produce a fund value of about £125,000 on retirement at 62, which
could then produce a pension of £5,437 (£3,300 a year in real terms). This
assumes a 6 per cent growth rate and a pension that escalates in retirement.
“This money should be saved in a low-cost Sipp (self-invested personal
pension) rather than a personal pension because this will provide much
greater fund choice. UK equity income funds are ideal for pension funds
because they produce a steady dividend stream which, when reinvested, boosts
the growth of the fund. Among my favorite equity funds are the Invesco
Perpetual High Income, Jupiter Income and PSigma Income funds.”
Action Plan
Check state pension entitlement and maintain contributions.
Save additional pension money, using a Sipp for greater flexibility.
Mortgages
David Hollingworth, L&C Mortgages
“The good news is that Hilary has managed to bag a very competitive lifetime
tracker mortgage, at 0.29 percentage points above the Bank of England base
rate. It should also carry no early repayment charges, so will allow plenty
of flexibility and enable her to make overpayments at any time.
“To achieve her aim of paying off the loan more quickly, Hilary could simply
start to make overpayments. These could be made either as regular monthly
payments or in lump sums as and when spare funds are available.
“To give an idea of the impact of relatively small monthly overpayments, let's
assume that the mortgage is on a full repayment basis over 12 years and that
overpayments of £50 a month are made. This would save £2,565 in
interest and the mortgage would be repaid 11 months early.
“As for purchasing a second home, with prices currently falling in many areas,
this is a project that Hilary should probably put on the back burner for
now.”
Action Plan
Make extra monthly, or lump-sum, payments to clear the mortgage debt sooner.
Postpone the purchase of a second home until the housing market looks more
positive.
Hilary's response
“I recognise the value of Mr Hall's advice about not having all your
investment eggs in one basket and plan to sell my Rolls-Royce shares, though
I expect I will keep my Aviva shares, as I think it is a strong company.
“I plan to start paying off chunks of my mortgage debt to shorten the mortgage
term. I was impressed by Mr Hollingworth's example of how even a small
monthly overpayment can cut your mortgage term by a substantial amount - and
save you thousands of pounds in loan interest.
“Mr Cox's comments have reminded me that I need to start putting away some
more money towards a pension. I like the idea of putting money into a Sipp
and will investigate that further, as well as looking at some of the funds
that he recommends.
“I have really enjoyed having this Money MoT - it has given me a lot of ideas.”
Would you like a financial makeover? Write to Money, The Times, Times House, 1
Pennington Street, London E98 1TB, marking your envelope Money MoT, or e-mail
moneymot@thetimes.co.uk. Please include current finances, short and
long-term goals and a daytime phone number. You must be prepared to disclose
your income and be photographed.
