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Seeking cash without commitment

FINANCIAL MAKEOVER; By sticking to PEPs and Tessas for now, the money will be much more accessible if Sabine decides to buy a flat or return to Germany
Sabine Stork is 29 and German. She has been living in the UK for the past six years. She works as a market researcher in London, earning pounds 22,500, or about pounds 1,300 a month after tax.

Sabine pays pounds 390 a month in rent, plus another pounds 27 in council tax. She spends a further pounds 600 a month.

Sabine has around pounds 3,500 in a 60-day notice account earning 4.75 per cent, plus a similar amount in German shares.

The company she works for has no pension scheme and she does not have a personal pension plan.

Sabine thinks that at her "ripe age" it is time to start saving for a pension. She also wants to know whether she can get a better return for the next six months or so on her pounds 3,500 in the bank.

What a financial adviser recommends:

Sabine is unclear how long she will remain in the UK: this will depend on how her personal life and career develop. She is certainly not planning to leave in the short term, however, and has looked at buying a flat.

For now she should probably stick to ways of saving that do not tie up her money to a great degree while at the same time offering attractive tax perks - PEPs and Tessas rather than pension plans.

A Tessa pays tax-free interest if the money put in is not touched for five years. But if necessary it can be cashed in before that time - in which case the interest becomes taxable.

PEPs are also tax-free and can be started with as little as pounds 50 a month. They can be cashed in at any time without penalty but, since they are basically stock market investments that may lose money in the short term, it is best to be prepared not to touch any of the money for at least five years. With the stock market at its present high, saving monthly also cuts out the risk of putting everything in just before a crash.

If her career in the UK develops into a longer-term commitment, Sabine could consider her pension options. Employer-based schemes are often a good deal if she should join a company that offers one in the future. Furthermore, rather than committing money to a personal pension plan now, she could use the proceeds from any Tessa or PEP to fund a plan at a later date.

Since she is earning and paying income tax on those earnings in the UK, any contributions Sabine made into a pension plan would qualify for tax relief - in effect giving her pounds 1 of investment for every 77p she put aside. If the proceeds from any Tessa or PEP were bigger than could qualify for upfront tax relief in any one year, there are rules to allow contributions to be treated as though they'd been made in previous years - enabling them to qualify for tax relief, assuming Sabine carries on working.

Sabine reckons she has pounds 200-pounds 250 a month to save. Some of this she needs for holidays, but she is happy with the idea of putting pounds 100 to pounds 150 a month aside for long-term saving - which is a reasonable sum that could eventually fund a healthy pension. However, by sticking to PEPs and Tessas for now, the money will be much more accessible should she decide to buy a flat or return to Germany.

Editor's note: Sabine could get around 1.5 per cent more interest on her cash and without tying it up to a greater degree. Sainsbury's Bank (0500 405060), for example, pays 6.15 per cent on its Instant Access account; money can be accessed by a Link cashpoint card or Bacs electronic transfer. The C&G (0800 717505) pays 6.5 per cent on its Instant account, which is operated by electronic transfer to a saver's own bank account so that money can in effect be accessed in two days. The Coventry building society (0345 665522) pays 6.35 per cent on its Postal 50 account, which is operated by post and has a 50-day notice period. And being one of the dwindling number of societies, the Coventry could yield a windfall at some stage in the future.

Extending the notice period to around six months will add little or nothing in terms of interest to these rates.

Sabine Stork was talking to Alistair Conway of the Conway Partnership, a south-west London-based independent financial adviser and a member of DBS, a leading network of IFAs. If you would like to be considered for a financial makeover for publication, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL. Fax: 0171 293 2096 or 2098; e-mail: indybusiness@independent.co.UK. Please include details of your current financial situation, a daytime telephone number, and state why you think you need a makeover.

Last week's makeover recommendations were by David Lewis of EFS Financial Management, an IFA based in the Isle of Wight - not, as stated, the Isle of Man.