Wealth Check: 'I want a pension and a good time'
Saturday 26 November 2005
Katie Butler is facing a financial dilemma. Single, and working as an account manager in a PR firm in London, she is torn between two priorities.
On the one hand, Katie wants to get responsible about her finances, saving more each month and contributing to a pension - possibly even buying a property in the future. On the other, she's a self-confessed shopaholic who would like to spend more money on clothes and going out. A strong dislike of debt means something has to give.
In the long term, Katie would like to give up work at 50, but so far she has not saved a penny for retirement. She has begun paying £100 a month into a Halifax Regular Saver account, and she is keen that any additional savings and investments she makes are safe.
We asked three independent financial advisers for their help: Anna Bowes, of Chase de Vere, Ben Yearsley, of Hargreaves Lansdown, and Patrick Connolly, of John Scott and Partners.
Katie Butler, 24, London
Personal: Katie is single and works as an account manager in a public relations firm.
Property: Shares a rented house in Clapham.
Debt: Has a £1,500 overdraft facility with her bank that she uses most months.
Savings: Pays £100 a month into a savings account.
Pensions: Is not currently saving for retirement.
Monthly expenditure: Rent of £550 a month, plus £700 living expenses.
Connolly says that, while Katie claims to hate getting into debt, her admission that she spends £600 a month on clothes and going out is revealing. The key to putting her finances in order, he says, is to be sure that she does not spend more each month than she earns.
Bowes also thinks the first step is to spend wisely, though she points out that Katie has done well to leave university without any debt. Bowes says that as long as Katie draws up a sensible budget - and sticks to it - there's no reason why she can't save more and still spend money on clothes and nights out on the town.
One move that would help Katie, Bowes suggests, is to move her current account to Alliance & Leicester, which pays good interest on credit balances and offers interest-free overdrafts for the first 12 months after customers sign up.
Yearsley suggests that Katie cuts up her credit card - having it in her purse is a dangerous temptation.
Yearsley wants Katie to put together a rainy day savings fund for emergencies - he recommends she builds up a fund with six months of salary in it, held with a tax-efficient cash individual savings account. As part of the process, Katie should transfer the funds she has saved with Halifax into the bank's cash ISA, which pays an attractive rate of 5 per cent.
Longer term, younger people can generally afford to be more aggressive with savings, perhaps taking on some exposure to the stock market, in return for the potential of better returns. But Yearsley says this is not currently the right approach for Katie, who doesn't want to gamble with her money. Also, she will need access to her cash if she decides to buy a property.
Yearsley says Katie may have to accept that retiring at 50 is not realistic. But she must start saving soon if she is to have any hope of achieving that target - people need to make pension contributions of half their age as a percentage of their salaries, he says. On this basis, Yearsley reckons Katie could save around £260,000 by the time she hits 50 - it sounds a large sum, but it would be enough to buy a pension income of only £5,000 a year.
This figure also assumes her money is invested well - Yearsley suggests that Katie joins her company pension scheme, or opens a self-invested personal pension (Sipp). With the latter, Katie would be able to invest in a range of solid equity income unit trusts.
Either way, Connolly thinks that Katie will need to make additional savings, either in an additional pension plan, or a tax-efficient shelter such as a stocks and shares ISA.
Bowes says that, despite Katie's cautious attitude, her pension contributions should have at least some exposure to the stock market, as over the longer term this is the asset class that is likely to produce the highest returns. She says that, while pension saving doesn't seem necessary at age 24, it is worth taking advantage of the tax reliefs on offer as soon as possible. It will cost Katie just £78 to make a contribution worth £100.
Finally, with no dependants, Katie does not need to worry about products such as life insurance, says Yearsley. However, she should consider permanent health insurance or criticial illness insurance - both are policies that pay out in the event that the holder is unable to work due to ill-health. The cover can be expensive, but it is something to consider.
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org
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