Tim Wilson is doing well in his career. At the age of 31 he is earning a
substantial five-figure salary, plus monthly commission in his job as a
recruitment consultant based in Central London.
He has bought a two-bedroom maisonette in a Victorian building in Battersea,
southwest London, which he shares with his girlfriend. He says: “It’s a
Victorian property with its own front door which is only 60 seconds walk
from Queenstown Road train station. It has a south-facing garden which
catches the sun and is just five minutes’ walk from Battersea Park.”
The property is currently worth ahout £350,000, down from about £400,000 a
year ago. In his spare time Tim enjoys socialising with friends and is a
keen sportsman. He uses the nearby park to keep fit and also plays hockey
there. His only debt, apart from a hefty mortgage, is a £10,000 loan to buy
a Mini Cooper car, on which he makes repayments of £115 a month.
But he is not resting on his laurels. He wants to save enough money to be able
to swap his maisonette for a house in a few years’ time. He also wants to
start making proper provision for retirement through a pension and through
long-term savings, about which he admits he currently knows very little.
However, Tim has a long way to go. He has no stock-market-linked investments
and savings amount to a cash Isa with First Direct, with a balance of £600 —
although he is now depositing £300 a month into the account.
He has just joined his company pension scheme, to which he is contributing
£250 a month, with his employer adding a further £100 a month.
After deducting all bills, plus his monthly Isa and pension contributions, Tim
reckons he has £1,000 left to divide between leisure activities and savings.
He thinks he can realistically save about £500 of that figure.
Tim says: “I currently have three main financial goals. I want to save money
for a house deposit, I want a pot of money I can dip into to pay for
improvements to my existing home and I want to start saving seriously for my
retirement.”
He also wants to know what he should be doing about his existing mortgage. He
currently has a £290,000 interest-only loan with C&G, fixed at a
rate of 6.19 per cent until October 2010. He is making monthly payments of
£1,520 on the loan.
Tim would like some suggestions from the experts about what sort of mortgage
he should take when the current deal finishes and whether his existing home
loan is worth sticking with until then.
He says: “The redemption penalties are pretty stiff so I doubt whether it will
be worth switching lender before the fixed-rate deal expires in October
2010.”
Even though he is putting a sizeable amount each month into his pension, Tim
wonders whether that, plus the employer contributions, will be enough to
provide a comfortable retirement. He asks: “Should I be putting additional
money into my pension and if so how much? And what about long-term
investment? I am reasonably tolerant of risk and would like to know what is
on offer and where I should be putting my money.
“I also need to build up a pot of ‘rainy-day’ money. How much should I aim for
and where is the best place to hold it? Is this something I could combine
with my cash Isa or should I keep that separate.”
Finally, there is the question of how best to save for a deposit on a bigger
property? Would it be better to keep all the money in deposit accounts — the
cheap and cheerful option? Or is there the time to put some money into
riskier but potentially more rewarding investments?
Tim Wilson — What the experts say
Short and medium-term savings Danny Cox Hargreaves Lansdown
“Ideally, Tim should build his cash savings so that his rainy-day fund holds
at least six months’ expenditure, that’s about £10,000 in cash.
“A cash Isa is a very good way to build part of this cushion. He can save up
to £3,600 a year — or £300 a month — and the account is completely tax free,
which is important since he is a higher-rate taxpayer.
“His First Direct Isa is paying 7 per cent interest over the first 12 months,
which is very good, although he will lose interest if money is taken out
before the end of the 12-month period.
“To get to that £10,000 goal, the remaining £300 to £500 of monthly savings
should go into a readily accessible account that can be dipped into to cover
bills and house maintenance if needed. ICICI, for example, is paying 2 per
cent on its internet saver.
“After 12 months he should shop around because the rate on his existing Isa
will then revert from the special 7 per cent to the variable Isa rate,
currently 0.2 per cent.
“If he is of a speculative nature he could consider a stock market Isa for
part of his savings. He could potentially benefit from the expected recovery
in the economy over the next few years, although investing in the stock
market has downs as well as ups and there is always the potential for losses.
“Normally a minimum of five years is recommended so Tim would have to be
comfortable with the extra risk of investing for a shorter three to
four-year period.
“If he decided to take this route, he should limit the amount to say £100 a
month and choose a unit trust that invests in a wide range of different
companies. My preference would be an equity-income unit trust, such as
Invesco Perpetual Income or Jupiter Income, both of which have exceptional
long-term track records. Investing in a stock market Isa would mean that Tim
would have no more tax to pay on either growth or the income that they
produce.”
• Action plan Build up a “rainy-day” fund of £10,000.
• Put more money into a cash Isa to save towards a house deposit.
• Consider putting some savings into stock-market funds.
Long-term savings and pension Geoff Penrice Bates Investment Services
“Tim is fortunate that he is a member of a company pension scheme, although it
looks as if he will have to make the bulk of contributions rather than his
employer.
“He will need to consider what level of retirement income he might need.
Generally people need at least half their salary as a pension, so we can
assume that he will need about £25,000 to £30,000 a year in today’s terms.
“If we assume inflation of 3 per cent a year until age 65, and an annuity rate
of 5 per cent, Tim will need to amass a fund of nearly £1.4 million over the
next 34 years. To achieve a reasonable pension we need to put away 10-15 per
cent of our salary into our pension over our working life. In Tim’s case
this means somewhere between £450 and £650 a month out of gross income.
“There will be tax relief at the higher rate, so effectively every £100
invested gross into a pension will cost him only £60 net. As a core holding
he could consider using funds such as Invesco Perpetual and Newton Managed
Pension funds, with some higher-risk satellite funds, such as Jupiter
Financial Opportunities, BlackRock Gold & General and JPM Natural
Resources.
“The downside of investing into pension funds is that your capital is tied up
until retirement. Tim may therefore wish to consider investing some of his
money into Isas using funds such as the Jupiter Merlin Growth Portfolio or
the M&G Managed Growth Fund. Isas are not as tax efficient as pensions
but still have tax benefits and you can access your capital at any time.”
• Action plan Put away at least £450 a month into a pension, with
a mix of solid and more adventurous funds.
• Consider putting some money into an Isa.
Mortgages David Hollingworth L&C Mortgages
“The first question relates to whether it is worth repaying the mortgage and
switching now. Any switch would take a couple of months to take effect and
the rates on offer at Tim’s loan-to-value are highly unlikely to cover the
early repayment charge (ERC).
“In order to build a deposit, he could consider putting more into his mortgage
as he will have the ability to overpay by as much as 10 per cent a year
without incurring the ERC.
“Secondly, overpaying means that he will effectively earn the mortgage rate on
his savings with no tax to pay. In other words, as a higher-rate taxpayer,
Tim would have to be earning a gross savings rate of more than 10 per cent
to get the same return as overpaying.
“While there wouldn’t be easy access to the funds he would have a larger
amount of equity to put towards his deposit when the time comes to sell.”
• Action plan Start making mortgage overpayments to build up more
equity in the current property.
• It’s probably not worth switching mortgages now.
Tim’s response
My finances are going to get a good shake-up
I was really interested in the advice about savings as I am looking to switch
from my HSBC account, which has a poor rate. I will look at the ICICI
account and some of the other good ones, such as those from Egg, Sainsbury’s
and ING. They all pay about 2.5 per cent to 2.75 per cent.
I will continue putting £300 a month into my cash Isa, where I am getting a
good rate — plus tax-free interest — and look at a stocks-and-shares Isa
after April 2010. From next January I’ll increase my pension contributions
to at least £450 a month and start playing a more active role in managing
the funds. I’ll make sure that I am feeding money into my Isa and savings
accounts at the same time.
I will contact C&G and increase my monthly mortgage payments to include
the 10 per cent a year that I am allowed to pay off during my fixed-rate
deal. This will increase the amount of equity that I have in the property
and enable me to obtain a lower loan-to-value on any subsequent mortgage.
• 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
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