Karen Davis was determined not to let a little thing like a recession stop her
launching her dream business in January: be-fabulous.co.uk, a social
networking site for women.
The 37-year-old mother of one, from High Wycombe, Buckinghamshire, wanted to
do something that would give her “the feelgood factor” and is excited about
watching her new business grow. However, the reality of the difficult
economic climate is starting to sink in. Her other business — Chicken/Egg, a
marketing consultancy that she founded five years ago — has been struggling.
And with her new website yet to make a profit, Karen’s finances are looking
a little less than fabulous.
“I earned about £40,000 in salary and dividends last year,” she says. “If
previous growth is anything to go by, I should take home about £50,000 this
tax year. At the moment, however, the books are not as healthy as they
should be.”
Karen is “an independent woman” but has had to fall back on her partner, Andy,
a 45-year-old IT worker, for financial support over the past two months. She
says: “I could be earning £60,000 or £70,000 in a couple of years, once I
start breaking even with the new business, so I am keen to get a bit of
advice to set me up for the future, as well as to help me out over this more
difficult period.”
The couple started renting their cottage together shortly before their
16-month-old son, Max, was born. Karen explains: “We decided that there was
no rush to buy, as it is important, now we have Max, to find the right
property, and consider local schools.” Usually, they each pay £1,200 a month
into a joint account to cover rent and bills, but Karen says: “Andy has,
very kindly, been covering my contribution while I try to win some more
work.”
They are beginning to search more actively now, especially as house prices are
lower, and would like a few tips on where to turn for a mortgage. They have
a substantial deposit from the sale of Andy’s flat, but the cash is in a
poor-paying savings account and Karen thinks that “now seems a good time to
shift it”. She adds: “I want to contribute 50 per cent of the mortgage
eventually, but as I have a fluctuating income I would like to know which
lenders will offer me a deal. I have never owned a property before, so I am
a bit daunted by the process.”
One of Karen’s biggest expenses is childcare. She pays £700 a month to have a
nanny take care of Max three days a week. “At the moment I pay out about as
much as I am taking home, so I do wonder whether it’s ridiculous that I’m
not looking after Max myself every day, but I love my job. It would be a
great help, though, if there was a way to reduce the cost of childcare.”
Her other outgoings include £115 a month on her car, £35 on her iPhone — two
things she “absolutely could not live without” — and £500 a month on a
£3,000 credit card debt.
Karen has limited savings — £2,000 in an HSBC e-Isa and £500 in Premium Bonds
— but is keen to start a more significant nest egg for her family: “Now I
have a baby it’s not just about me. I am not married to Andy, so if
something went wrong there I could be living in a shoebox — though God knows
I have enough of those.”
Karen froze her pension in 2004 when she moved out of her marketing job to set
up Chicken/Egg. She says: “I have three policies with Aviva, all frozen,
with a fund value of a little more than £21,000 — not enough to keep me
going in my old age.”
She is ready to save towards her pension again but is unsure how to go about
it: “I have heard that if I move my Aviva pension to another provider, my
fund value will decrease. Is this true? What on earth do I do with the
frozen funds? Also, as I am now self-employed, how can I get pension
benefits — are there some tax breaks?”
What the experts say
Mortgages: Jonathan Harris, Savills Private Finance
“Karen has a track record of earnings for the past five years, so she may not
need a specialist mortgage for the self-employed — known as a self-certified
loan. She could qualify for a mainstream residential loan with a wide choice
of lenders, particularly as Andy is on a good salary and they have a
significant deposit.
“Andy is 45 but this will not be a barrier to getting a mortgage. Although
most people opt for a 25-year term, you do not have to. Andy could, for
example, go for a 20-year term to coincide with the state retirement age. If
the couple really want a 25-year term, the lender will want to see evidence
that they can afford the mortgage payments if Andy retires at 65.
“In terms of the type of mortgage, a fixed rate will give them some security —
interest rates are low at the moment, but they are expected to rise
dramatically next year. A longer-term fix — five years, rather than two —
will give peace of mind for a longer period.
“House prices have fallen since the peak in 2007, but the bottom of the market
seems to be in sight. The trouble with timing the market is that you could
miss out and only realise that you have when prices start to rise again. If
you want to buy, have found a house you like and can afford it, then now is
the right time to go for it.”
Action plan
Investigate fixed-rate home loans.
Start house-hunting.
Pensions: Rob Borrill, Pearson Jones
“Karen wishes to plan for the long term, but first she should ensure that her
more immediate future is financially secure. Initially, I would suggest that
she save a rainy-day cash fund equal to at least six months’ expenditure.
For Max’s security I recommend a family income benefit plan for an income of
£2,000 a month (at a cost of about £15 a month). This would ensure that
Max’s guardians have an income to look after him should something happen to
Karen.
“To make sure that Karen has a continuing income in the event of incapacity,
she ought to consider an income protection plan. This would provide an
income, after a deferred period of illness, until she recovers, retires or
dies. As an example, for a monthly premium of £55.47, Karen could provide
for an income of £2,000 a month after a deferred period of a year until she
is 65.
“Once these are in place Karen can start to think about contributing to a
pension. Her state retirement age is 67, so she has 30 years for retirement
planning — adequate time to save. Karen’s existing plan provides her with a
good start upon which she can build, and there is nothing wrong with using
the Aviva plans. If they are merged into one plan, Karen should have a
discount from the normal 1 per cent annual management charge, having a fund
of above £20,000.
“It is important that she makes the right fund choice for her risk profile.
There should be no cost if Karen moves provider, but I would suggest that
she considers this at a later stage, when her funds have grown to about
£100,000 and more complex investments may be appropriate or she may wish to
use the fund for self-investment.
“Karen should have her company pay any future pension contributions, saving
her national insurance and corporation tax. To provide a reasonable pension,
Karen should consider contributing a percentage of her salary equal to half
her age — ie, 18.5 per cent.
“As an employee of her company, Karen can buy childcare vouchers out of her
income to help with the cost of Max’s nanny.”
Action plan
Apply for a family income benefit plan and income protection plan.
Resume pension saving.
Claim childcare vouchers through the company.
Small business: Ali Steed, MyMoneyDiva.com
“There are plenty of grants available to new and existing businesses — about
4,500 in all, worth a total of £50 billion. They are available from various
sources: local or central government, the European Union, regional
development agencies and charitable trusts, and some are aimed specifically
at women in business.
For up-to-date details, go to www.j4bgrants.co.uk. Registration is free for
basic information about what is available.
“Karen needs to make sure that she has the highest profile possible to make
be-fabulous.co.uk successful, which means using social networking sites and
blogs to maximise the impact, as well as traditional marketing. Google
Analytics, which you can access through the Business Solutions section on
the Google.co.uk home page, gives an easy way to track the number of hits
she is getting. She can also test content to see what attracts the most
users.”
Action plan
Investigate small-business grants.
Use social networking sites to raise the profile of be-fabulous.co.uk.
Karen’s response
I feel much more positive about the future now. I am delighted that Andy and I
may not need to have a specialist mortgage. I will definitely heed
Jonathan’s advice on timing, and I have already started to look seriously at
properties so we don’t miss out.
The financial advice was a bit gloomy, wasn’t it? I know I have to look at the
reality of life and, yes, I am going to die one day, but it’s horrible when
in black and white.
Nevertheless, I will look into both family and income protection plans. On the
bright side, I now feel less concerned that I have not been paying into a
pension for the past five years. Applying for childcare vouchers is now on
the top of my to-do list — it sounds like something that would really help
out at the moment.
I wasn’t aware of the grants suggested by Ali, so I will see if I am eligible
for anything. As a marketeer, though, I am well versed in how to make the
most of my digital strategy and use Google Analytics, so I must admit that
this advice was a little like teaching grandmother to suck eggs.
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