We may be in the midst of a housing downturn, but our love of property has not
wavered. Joerg Thieme has lived in the UK for three years and has been
contributing to two pensions, but his friends' preoccupation with the
housing market has him questioning where his priorities should lie.
The 32-year-old German, who has been saving in an NHS final-salary pension
scheme and a stakeholder fund with Virgin Money, says: “In Germany, you save
hard for your pension so you have a good life when you retire. But my
friends in the UK are focused on paying mortgages or getting on to the
property ladder. Whenever I have asked them, none of my friends could tell
me anything about their pensions.
“In the UK, you concentrate on your house and then that is your future, but
until now I have been focusing on my pension.”
Joerg is now wondering whether he should also embrace the security of bricks
and mortar, diverting some of the cash he pays into his pension pots towards
a deposit. He is due to receive £18,000 in the next two weeks from a
longstanding compensation claim and does not know whether this should form
the basis of a deposit.
“I would like to save it all for two years and then get a mortgage, but I am
not sure where I would put it,” he says. “Will I be able to get a mortgage
in two years' time?”
If he does decide to buy, Joerg would rent out the property to cover the
mortgage payments, as he plans to continue his travels.
In the past ten years Joerg has lived in four countries. He left Berlin for
Sydney in 2001, working for a year before heading to Switzerland. In 2004 he
moved to the UK, working in London before finally settling down in Brighton,
where he has lived since 2005.
He says: “I have travelled a lot and been partying a lot as well. But now I
have calmed down and want to focus on my future. Although I've worked in
many different countries I didn't start a pension until I arrived in the UK.”
Joerg is a radiographer working for the NHS at the Royal Sussex County
Hospital. He earns £26,000 a year. He started contributing to his NHS
pension in 2005, paying £152 a month. Joerg also pays additional voluntary
contributions of £152 a month to boost his pension pot.
Alongside the NHS scheme, Joerg also pays £100 a month into his Virgin
stakeholder pension, which is currently worth £2,747.
He opened this pension because he plans to travel again in the future,
possibly returning to Switzerland for a year or two. The Virgin plan would
allow him to continue contributing to a single scheme, rather than having to
establish another pension abroad.
However, Joerg's commitment to the Virgin plan is being tested by the deal
that he receives from the NHS, which makes a contribution equivalent to 14
per cent of his annual salary.
He asks: “Should I put all my money into the NHS scheme? I could concentrate
more of my savings into the scheme if it was the best place for it, but I
really don't know.”
Apart from his pension contributions, Joerg's main outgoings are his rent and
bills - a little more than £1,100 a month - which he splits with his
partner. He has no debts or credit-card balances to pay off. The only other
standing order from his current account is the membership subscription for
his local gym.
Joerg is also saving £150 a month towards a holiday in South America next
year. He has almost £2,000 in an HSBC Isa, which is paying about 1 per cent
interest, but he would be happy to move his money to a better-paying savings
account, provided that it offered easy access to his cash.
Joerg is also planning another trip overseas before the end of the year.
Joerg Thieme - What the experts say
Pension and savings: Jason Witcombe, Evolve Financial Planning
“Through the NHS scheme there is the option to oay additional amounts into
your pension. This is known as ‘additional pension', which recently replaced
the previous ‘added years' facility. There is a calculator on the NHS
website to show how much it costs to make these extra contributions. Joerg
should recheck what his extra £152 a month is paying for. If it is not added
pension, he is probably paying into one of the NHS's money purchase
additional voluntary contribution (AVC) schemes through either Standard Life
or Prudential.
“These would work out slightly more cost-effective than the Virgin scheme.
Most funds in the Prudential AVC charge 0.75 per cent a year, whereas the
Virgin pension charges
1 per cent. Joerg should remember that he can pay into the Virgin plan only
while he is a UK resident.
“I would advise Joerg to be as flexible as possible in his retirement
planning. He should not tie up everything in pensions. Saving in Isas, for
example, is also tax-efficient, but unlike pensions, the money is easily
accessible. To maximise tax-efficiency he can move £3,600 of his savings
into a cash Isa for the current tax year and do the same in future tax years.
“If Joerg is unlikely to buy a house, he could use some of this money to start
a stocks-and-shares Isa. He could consider Fidelty FundsNetwork or Cofunds,
which are both fund supermarkets that would allow Joerg to select from a
number of different fund groups. He should consider equity or property
funds.”
Action plan
Do not underestimate the value of the NHS pension.
Retain flexibility by investing in Isas.
Housing market: Richard Morea, London & Country Mortgages
“Property has performed well as an investment over the longer term, and with
reports of interest returning to the purchase market, there is no reason to
doubt that this will continue to be true. I would emphasise, however, that
this is a long-term commitment.
“There are costs to enter and exit the buy-to-let market - stamp duty, legal
work, survey and estate agent fees - and it can be difficult to get your
money out in a hurry. Therefore, this should not be considered a short-term
bet.
“Joerg also needs to realise that his travel plans mean that there are other
potential costs with buy-to-let. The biggest is likely to be the fees
charged by a letting agent, typically about 10 per cent of the monthly rent.
“It is also easy to forget about the possibility of tenancy voids. Joerg must
consider how the mortgage will be paid if no rental income is being
generated. He must research what types of property will attract interest.”
Action plan
Consider the costs of buy-to-let.
Perform research on the best type and location of property.
Pension: Bryan Innes, Towry Law
“The contributions that Joerg is making to pensions will provide excellent
value in later years, but it is important that this planning fits in with
his overall financial objectives.
“Investing in property now may seem like a good investment, but there are many
reasons to discourage him from this. The rental market is not guaranteed, it
is a large and illiquid investment in one asset and he may not return to
live in that area.
“My guidance would be to reduce contributions to pensions, possibly the Virgin
Plan, and look to establish a good cash sum for a house deposit and
associated costs. He should invest the maximum allowance in a cash Isa to
shelter a proportion from tax.
“Though interest rates are low and generally unappealing, it is not
appropriate, given the uncertainty of his position, to tie up funds or
expose funds to investment risk.”
Action plan
Reconsider whether it is a good idea to tie up funds in property.
Divert cash to an Isa.
Savings: Michelle Slade, Moneyfacts.co.uk
“Cash Isas are many people's starting point for savings as interest is tax
free. The Premier Isa from Manchester Building Society is offering the top
rate, at 3.56 per cent, closely followed by the Golden Isa from Barclays
Bank, at 3.55 per cent.
“If Joerg does not need to access his money, he will get the best return on a
fixed-rate bond. ICICI Bank is offering 4.2 per cent on its two-year HiSAVE
fixed-rate bond.
“By adding to his existing savings, Joerg can put himself in a much stronger
position to enter the housing market. Typically, you can save between £20
and £250 a month in a regular saver account. Barclays offers the highest
rate, at 5.84 per cent, on its Monthly Savings account.”
Action plan
Lock away savings for two years to achieve the best returns.
Consider a regular savings account.
Joerg's response
It is wise not to tie up all my money in my pensions, but I'm not sure whether
I will invest the £18,000 in a stocks-and-shares Isa or a cash Isa. I
could then transfer savings that are currently earning little in the HSBC
Isa into the same stocks-and-shares Isa, but I will have to check if this is
possible. I will also investigate using different funds to spreadrisk.
The details of the NHS pension scheme have changed since I signed up in 2005.
I was really interested to read about the money purchase AVC schemes through
Standard Life and Prudential.
I will change the Virgin pension and possibly transfer the funds to one of
these AVC schemes. I will contact the NHS pensions helpline and discuss my
options, but the advice has certainly focused my attention on the pensions.
I had not thought about using a letting agency to manage my property while I
was travelling and the fees are expensive. It is difficult to plan because I
do not know where I will settle down. I could end up in Australia, Germany,
Switzerland or the UK.
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