Wealth Check: 'I do not want further debt on my credit card'
Saturday 09 October 2004
Samantha Jackson works on the events team at Outward Bound, a young people's educational charity. She is Australian, likes to travel - especially on short breaks around Europe - and is training for the London Marathon. Ms Jackson wants to find out about health cover and pension schemes, as she has no pension. She also wishes to save for a holiday with her sister, who will be visiting from Australia in the new year, as she does not want to incur further debt.
Ms Jackson was a victim of identity theft earlier this year, and wants to know if she is likely to be a victim again, and if it will affect her when applying for a mortgage of paying off her debts.
We put her case to Patrick Connolly at John Scott and Partners, Paul Byles at Towry Law, and Ben Yearsley at Hargreaves Lansdown.
SAMANTHA JACKSON, 28, CHARITY WORKER
Education: Bachelor of Teaching & Bachelor of Social Work.
Debt: £1,200 on Visa card. No overdraft.
Savings: Nominal amount in NatWest ISA. Paying £200 a month by direct debit.
Monthly outgoings: Rent £250; with £400 to £450 left over after credit card repayments, mobile phone, bills and gym membership.
DEBT AND SAVINGS
Mr Connolly cautions that Ms Jackson is likely to be earning less interest on her Isa than she is paying on her Visa card. If so, she should use her savings to pay off her card debts first. As Ms Jackson's income exceeds her outgoings, she should be able to do this quickly.
Then she should build up a cash reserve for emergencies. Her cash Isa is a good starting point. Once she has taken the holiday, she could start thinking of longer-term, equity based investments. Mr Yearsley advises everyone should have six months' income in cash reserves, although some advisers say three months' is enough. Abbey is currently the most competitive mini-cash Isa provider, paying 5.35 per cent.
Mr Byles commends Ms Jackson for setting up a direct debit to her Isa, as regular monthly savings are the best way to build up a reserve, and suggests Ms Jackson could consider putting money into equities, starting first with a UK-based fund. Unit trusts and investment trusts accept contributions from £50 a month.
PENSIONS AND HEALTH COVER
Mr Connolly points out that although pensions are tax-effective, they are not that flexible. He says Ms Jackson should prioritise cutting her debts. She could then combine a pension with Isas; the latter are not as tax-efficient as pensions but do not retain money for as long.
Mr Yearsley says Ms Jackson's first port of call for a pension should be her employer. By law, they must have set up a Stakeholder pension scheme even if they do not contribute to it. The advantage of a pension, though, is up-front tax relief, with tax-free growth in the pension fund until retirement.
Mr Byles recommends Ms Jackson clears her debts first. But once she has done that, and set aside an emergency cash fund, she should look at her pension. If she cannot join a workplace scheme, she can pay up to 17.5 per cent of her salary into a Stakeholder plan. Mr Yearsley cautions that, with no dependents, there is no need for her to pay for life assurance. She could consider permanent health or critical illness cover.
Mr Byles advises Ms Jackson to check sick pay arrangements with her employer. She could then dovetail any income protection plan into her workplace arrangements.
Mr Connolly also suggests an income protection policy. This will cover her income if Ms Jackson is off work longterm due to illness or injury. She should check first whether her employer provides any cover.
Mr Yearsley says that just being a victim of fraud should not affect Ms Jackson's credit history. But this is easy enough to check, by contacting Experian (www.experian.co.uk), Equifax (www.equifax.co.uk) or Call Credit (www.callcredit.com). Each will send a copy of Ms Jackson's file for £2, or she can access her files via the Internet for about £10.
Mr Connolly says it is worth checking credit reports on a regular basis, as any fraudulent activity will show up quickly.
Mr Byles point out that the introduction of Chip and Pin technology by the banks should dramatically cut card fraud; it might pay Ms Jackson to ask for such a card immediately. She should also ask the credit reference agencies to note a "disassociation" with any issues on their files resulting from fraud.
Advisers' views are given for guidance only.
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