Financial Makeover: Maggie should make it up as she goes along

In the first of a new series where an expert examines a reader's finances, our 'client' is advised to set up a pension plan

Name: Maggie O'Farrell

Age: 24

Occupation: Editorial assistant at a newspaper (the Independent on Sunday)

Salary: pounds 14,500

Pension: none

Mortgage: none

Savings: pounds 2,500

Investments: none

Maggie's father has been nagging her to sort out a pension. But her main short-term objective is to find a flat to share; she is currently staying with friends.

She has only worked for the IoS for six months, having graduated three years ago from Cambridge University with a degree in English Literature, and is single and has no dependants.

She would like to build up some savings to buy a property at some point in the future. She is debating whether to join the staff pension scheme or even start a pension at all. Maggie has ethical concerns as to where her money is invested.

What should she do?

Aged 24, Maggie may well think that she is too young to be thinking about a pension. But the point about pensions is that the sooner you start saving, even with a small amount, the more your money has a chance to grow.

Delay increases costs quite dramatically. Say Maggie was to wait another five years before starting putting money into a pension, she might have to think about monthly savings 50 per cent higher than if she started now to reach the same level of retirement income.

Maggie has a choice: the Independent has a rather unusual scheme in that the employer's contribution of 2 per cent of salary (which does not need to be matched by the employee) can be put into either the company scheme or into a personal pension plan. Thus Maggie could choose not to join the Independent scheme and set up her own personal pension to take from employer to employer in the future.

The big advantage of many company schemes, including this one, is low costs; to set up a personal pension will soak up more of the 2 per cent put in by the company.

If Maggie is planning to stay with the Independent for a long time then undoubtedly she would be better off to take the cheaper company option. However, if she might be moving in the short term, she may prefer to do her own thing.

For the best of both worlds Maggie should consider joining the company scheme and setting up her own freestanding additional voluntary contribution (FSAVC) plan, in effect a top-up personal pension. She will get the lower charges of the company scheme as well as having the option to put extra money into a pension fund that takes account of her stated ethical concerns in its investment policy. If she changes employer, she can take the FSAVC with her and can change it without penalty to a full-blown personal pension if there is no company pension scheme at her new employer.

Pensions require serious funding. Maggie has indicated that she would be prepared to put pounds 50 a month into her pension. The good news is that this becomes nearer pounds 66 when tax relief is added on. Together with the 2 per cent contribution from her employer, Maggie could be headed for a pension at age 60 with the current spending power of a little under pounds 4,000, - that is, the actual pension would be more in pounds terms, but only worth pounds 4,000 after inflation is taken into account. In order to achieve a pension equivalent to pounds 7,500 of today's money she should be thinking about putting in an additional pounds 60 a month net on top of the pounds 50 she says she can afford. Although these figures look daunting, it will be worse the longer she waits before starting a pension plan.

As far as saving up for a deposit on a flat is concerned, Maggie has pounds 2,500 so far. But much of this is in her current account where she is getting no interest. She should immediately transfer this to a building society savings account. She also has some money in National Savings Income Bonds, which require three months' notice for withdrawals. These are paying 6 per cent before tax, which is fair enough.

Maggie might also consider a PEP, which is a tax-free way of investing in the stock market. PEPs can be started with as little as pounds 50 a month and are flexible - you can pay into and stop payments at will, so they are suitable for someone like Maggie who is not sure whether she would be able to maintain the commitment. And there are PEPs that invest ethically: try PEPs in the ranges offered by Friends Provident, NPI, Credit Suisse and Scottish Equitable.

Something else that Maggie should consider, if not now at some stage in the future, is insuring her income against the possibility of not being able to work through long-term ill-health. This might prove particularly important if she were to get a mortgage. Eleven pounds a month could buy her a policy that would give a tax-free payout of half her gross income if she fell ill. Insurance policies from Permanent, Zurich, Friends Provident and Swiss Life are all worth considering.

q Maggie O'Farrell was talking to Amanda Davidson, a partner at Holden Meehan, an independent financial adviser. Phone 0171 404 6442 for a free copy of Holden Meehan's 'Independent Guide to Ethical and Green Investment Funds'.

If you would like to be considered for a financial makeover, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London EC1 5DL, including a phone number.