Your Money: Safety without houses

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The Independent Culture
Financial Makeover

NAME Vivienne Heller AGE 30 OCCUPATION Journalist

Vivienne has been working for a national newspaper for about a month and is currently on a short-term contract. Her main concern is to buy a property for about pounds 150,000, with Vivienne's mother acting as guarantor. She is likely receive a sum of pounds 15,000 within the next few years from a previous inheritance. Ideally, Vivienne would like to live abroad for up to 12 months within the next few years and if this were to happen she intends letting the property to generate an income.

The adviser: Philippa Gee, managing director at Gee & Co, fee-based independent financial advisers, Foresters Hall, 1a Wyle Cop, Shrewsbury SY 1UT (01743 236 982).

The advice: When colleagues and friends have already established long- term financial plans such as mortgages or pensions, it can pressurise the less "disciplined" to begin treading the path towards what they perceive as security.

The pounds 15,000 could prove an ideal deposit, otherwise there are no funds available. Incidentally, Vivienne tells me that she is very happy in her current flat and would be pleased to stay if it were not for the perceived lack of financial stability.

I believe that for Vivienne a more suitable route would be to build up a cash fund to give her a stronger foundation. The monthly mortgage commitment of up to three times her rent would also leave her with zero spare income.

Vivienne wants the mortgage promptly because she feels a lender would be more willing to offer a loan based upon her current six-month employment contract. While this is in part correct, any lender would want to see a second contract as a way of demonstrating continuity, before making an offer.

As for letting the home, she needs to bear in mind that there would still be the mortgage to pay, as well as any letting agent's costs and possible higher mortgage payments.

I would suggest Vivienne continues renting her current flat for now so that when she does move abroad she will have much more financial freedom by simply ending the lease and not having any UK property costs. Even if Vivienne decided not go overseas, I would still suggest holding off on the mortgage.

There are still serious issues for her to consider. Vivienne should start a pension, but she needs to bear in mind that any money invested in this way is effectively being "locked-up" until retirement.

On the other hand, she cannot join her company scheme, so the sooner Vivienne starts saving for retirement the better. She would currently benefit from 23 per cent tax relief on the premiums invested. I would suggest that she begin saving on a monthly basis with an affordable amount which can be topped upwith one-off single premiums. Vivienne needs to be extremely careful in the choice of pension as she needs a product which is extremely flexible, allowing her to stop and start premiums without penalty to cope with job, salary and personal changes.

I would recommend Vivienne take out a personal pension with Scottish Widows and make sure it is arranged on a nil-commission basis, so that commission is re-invested to boost the amount allocated (an allocation rate of 105 per cent would be achieved).

Scottish Widows is a strong mutual company and, although not a prime concern, there may be a flotation from which with-profit policyholders benefit. It has a flexible contract with a range of funds and Vivienne could stop and start premiums without incurring penalties. An initial monthly premium of pounds 50 would suit her.

Vivienne already has a PEP and a small share-holding. While this is excellent, they could not be liquidated immediately and are more of what we would call a "medium-term" investment.

There is a lack of accessible money and this needs to be addressed, not only to give herself an emergency fund but also to have enough to repay fairly substantial credit card liabilities. Paying interest on this of nearly 20 per cent does not benefit her.

Vivienne has begun saving pounds 350 each month by way of an automatic standing order into another bank account. At the moment she has four different accounts with a combined total of pounds 1,950, paying an average of less than 4 per cent.

I would suggest that Vivienne opens open an "Instant Transfer" account with the Cheltenham & Gloucester which pays a current rate of 7.5 per cent gross and transfers her accounts into it. Combining the pounds 350 with the further sum you feel comfortable with setting aside each month, she should set up a standing order for pounds 750 (after pension) into this new account. By the end of the next five months, to tie in with her current contract ending, you will have settled all liabilities and still have over pounds 2,000 in cash.

We need to build this cash sum up again to at least pounds 6,000 to give Vivienne the security she wants and allow her to cope with short-term fluctuations in income.

At a later date, Vivienne will need to move on to the next financial step. She may want to consider an Individual Savings Account (available from April 1999). She will be able to hold similar funds to those in her PEP, plus cash (subject to certain limits). By then, Vivienne will also know if she needs money to finance her stay overseas or buy a house and I would suggest that she opts for a simple arrangement which is low on charges.

Vivienne is totally reliant upon herself for an income and should consider protecting against sickness and being unable to work. This would need a policy known as permanent health insurance (PHI). However, the level of cover would depend upon her earnings, as the policy would be for a maximum annual amount of no more than 50-60 per cent. It would therefore be prudent to discuss her career expectations further before embarking on this.

While we do not suggest that she proceed immediately with both a mortgage and pension, as Vivienne had initially wanted, our recommendations should provide more freedom and independence. This will allow her to deal with the anticipated changes in her business and personal life over the next few years more effectively, which is the essence of a good financial plan.

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