Financial Makeover: Start saving, Simon

NAME SIMON WHITEN AGE 29 OCCUPATION GROUP ADVERTISING MANAGER

SIMON IS on the verge of increasing his salary by pounds 7,500 at a stroke. From next week he will start a new job paying pounds 27,500 a year, up from pounds 20,000, plus a further pounds 10,000 in bonuses.

With the increase in salary comes the need to give his overall finances some attention. Up to now, Simon has left money planning on the back-burner. But he would like to feel more financially secure.

Simon, who is single, lives in rented accommodation, for which he pays pounds 380 a month. He would like to buy a home and is thinking of a 100 per cent mortgage to fund the purchase of a flat for about pounds 95,000.

As such, he has no pension entitlements - nor does his new employer provide an occupational scheme.

He has so far avoided saving and has no investments, bar a car which he estimates is worth pounds 3,000, garaged at his parents' house outside London. But he currently drives another car on HP, a Peugeot 306 for which he pays pounds 350 a month.

The adviser: Philippa Gee is managing director of Gee & Co, fee-based independent financial advisers, Foresters Hall, 1a Wyle Cop, Shrewsbury, SY1 1UT, (01743 236982).

The advice: To begin with, I am concerned that your existing car payments take up more than 18 per cent of your net income. Not only will this continue for the next two years, but then an additional lump sum or new agreement will also be required. I would urge you to avoid upgrading to a more expensive car at that time.

While you see pension planning as a priority, I would advise you to consider the mortgage "conundrum" first, especially as you have already found a flat to buy.

You have two options: either take the builder's offer of a "free" 5 per cent deposit or take out a 100 per cent mortgage. You should remember that the 5 per cent "offer" might mean an inflated purchase property price (you could run into problems when you come to sell) or by a special arrangement with a lender paying an introductory commission (you might find yourself locked into a deal with high interest rates, charges or penalties).

You should get an independent valuer to give their opinion on an appropriate purchase price for the flat.

If you were to opt for the 100 per cent mortgage, you are likely to face higher interest rates than if you had a deposit. Using a capped-rate scheme as an example, where payments are guaranteed not to rise above a specified level, Royal Bank Of Scotland offers a capped rate of 7.79 per cent until 2003 on a 100 per cent loan. This compares to a capped rate of 6.29 per cent to 2004 with Northern Rock if you had 5 per cent deposit.

Monthly costs on a capital repayment basis with the RBS scheme would be around pounds 710 each month, virtually double your current rent. In addition, you will need life cover, plus one-off costs including solicitors fees, valuation charge, mortgage arrangement fee and perhaps lender's indemnity insurance.

There could be a problem with your earnings which are comprised of salary and commission (not guaranteed). It will depend which lender you use. It might be prudent to delay the purchase for a number of months, see how the new job develops, boost your savings and then take an informed decision.

To begin with, you need to start some serious saving immediately. Set up a standing order from your current account to get the discipline in place and do this with a figure of at least pounds 350 and ideally more, which will also help you decide how affordable a mortgage could be.

Standard Life Bank currently pays an excellent rate of 7.35 per cent on starting balances of pounds 1 which compares to just 2.5 per cent offered by your existing deposit account.

You are concerned about providing for your pension, but while you want to begin investing premiums straight away, you will perhaps now appreciate the effect a mortgage will have on your overall plans.

I would suggest a realistic amount of pounds 100 a month remembering this is money which will be effectively locked up until retirement.

After the probationary period, talk to your employer to see if they would be willing to pay a portion of your commission as a pension contribution straight into your pension plan.

This would save you National Insurance on the amount "sacrificed", as it will for your employer. To make it worthwhile you need to get your employers to top up the investment by their saving in National Insurance, thus boosting the amount paid in at no extra cost to either of you.

You feel you are quite a speculative investor (given the opportunity). You may want to consider a unit trust provider such as Gartmore, which gives access to a wide range of funds from a simple deposit or gilt fund to a variety of equity funds investing in the UK, Europe or further afield.

I would suggest you adopt a lower-risk profile at least initially and split the amount between two different funds to give you some diversification. Gartmore does allow pensions to be set up on a nil-commission basis, which would reduce the charges incurred on the money invested.

Your new employment contract provides no protection against ill-health above the statutory entitlement. There are various contracts available including those to protect a portion of your income if you were unable to work for a period of time, those which would pay out a lump sum on diagnosis of a serious illness and those to cover the costs of obtaining private medical treatment. I would suggest the mortgage issue should be addressed first so that we know what residual funds are available.

Once you have started saving and made decisions on both your mortgage and pension arrangements, you could then consider further plans. These should include investing a monthly sum into a TESSA, PEP or indeed an ISA (from April 1999) to provide a balance between short-term cash and long-term pension assets. There is however, little point in starting a contract now, only to have to pull out of it after a matter of months.