Avon saleswoman wants more than cosmetic results

Wealth check: High earner with no debts is looking to move into buy-to-lets, expand her business and see the world

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The patient

Self-employed saleswoman Susan (not her real name) is keen to expand her business, build up an investment portfolio including buy-to-let properties, and move into a bigger house.

The 36-year-old from Birmingham, is an independent senior executive sales leader with Avon and currently earns around £65,000 a year.

"I'm not a salaried employee or on payroll, so this is on a commission-basis," she says. "I've been in this role since November 2006." As a self-employed worker, Susan ensures she puts enough money aside to pay her tax bill. "I save at least 10 per cent of my earnings each month," she says. "I aim to put aside between £6,000 and £10,000 a year for both savings and tax."

When it comes to investing, Susan prefers equities to cash, given the low returns on offer on cash accounts. "I know this is a riskier approach, but I do understand that a portfolio needs to be balanced," she says.

"I'm looking to invest for longer-term growth, as I'm currently investing in contract for difference investments for short-term growth. While investing in CFDs is high risk, there are potentially some very big gains."

Susan has no debts, other than the mortgage on her two-bed house.

"I bought the property this year for £90,000," she says. "I have a relatively small mortgage on a two-year fixed-rate deal, and monthly payments are just £348."

At present, Susan has no retirement savings. "I'd like to build up a portfolio of rental properties to act as my pension pot," she says. "I'd also like to be in a position to buy a four or five-bed home in a prime location in a few years' time. Aside from this, I'd love to be able to travel more."

In terms of protection, she has personal accident insurance with Swinton costing around £10 per month.

The cure

Our panel of independent financial advisers agree that Susan has shown fantastic entrepreneurial spirit in establishing and building her Avon business so successfully. They also commend her for getting herself into a position where she is debt free, owns a property backed by an affordable mortgage, and saving more than 10 per cent of her salary.

However, they urge her to start thinking about longer-term savings through pensions and equity ISAs, and to diversify her investments to spread risk. They also urge her to review her protection policies.

Build up cash savings

Patrick Connolly from AWD Chase de Vere recommends Susan builds up her cash savings.

"This is particularly important for self-employed workers whose earnings may fluctuate," he says. "This can avoid needing to sell investments at the wrong time, or going into debt in order to raise cash."

Mr Connolly suggests Susan split her cash savings into two.

"She could build up short-term savings to meet her tax bill and to pay for her travels," he says.

"She can then build up longer-term savings for her emergency cash fund. These could also meet other requirements such as saving to build up a bigger deposit to buy a larger house."

Make use of Isas

Kusal Ariyawansa from Appleton Gerrard Private Wealth Management recommends Susan transfers the majority of her savings into an easy-access cash individual savings account, as these are tax-free.

The current cash ISA limit is £5,340, rising to £5,640 from the start of the new tax year on 6 April.

"Ideally Susan should look to build up a fund of around £10,000 in cash ISAs," he says. "Once she has done this, she can focus on capital growth above inflation by directing money into stocks and shares ISAs, where she can purchase shares within a fund."

He adds that the advantage of this, over buying shares direct, is that a fund manager will have more knowledge and expertise. "Susan’s money would also be diversified further – reducing risk," he says.

Don't ignore pension saving

As Susan is self-employed, she won't have access to a company pension and will need to make all long-term investment arrangements herself, says Mr Connolly.

"For most people, the best approach is a combination of pensions and equity ISAs," he says. "Pensions provide initial tax advantages but are quite inflexible, whereas ISAs are tax-efficient and are far more flexible."

As Susan is a higher-rate taxpayer, she will benefit from 40 per cent initial tax relief on her pension contributions, he adds.

"A sensible starting point may be splitting her investments equally between pensions and stocks and shares ISAs," he says. "She should look to make relatively small regular premiums, then look to top these amounts up each year with any residual money once she has paid her tax bill. "

Investment warning

Mr Ariyawansa warns that CFDs are high-risk products suitable only for sophisticated investors.

CFDs give exposure to shares at a fraction of their normal price, but the investor is liable for the full amount of gains or losses from the shares, meaning they can make or lose a significant amount of money quickly. "Unfortunately, novice investors can get duped into CFDs once they've seen the headline growth figures," says Mr Ariyawansa. "But while there may be great results initially, these complex products have opaque charging structures, and the side effects can be irrevocable."

Justin King from MFP Wealth Management agrees: "I consider CFDs to be more akin to gambling than investing," he says.

Mr Connolly agrees there is a need for more balance. "Susan cannot achieve this by investing in CFDs or rental properties, where she will be limited to a very few properties, or even just one, with banks tightened lending criteria," he says. "She should look to invest in pensions and equity ISAs through a combination of shares, fixed interest and commercial property holdings to spread risk."

Consider an offset mortgage

Mr King suggests that when Susan’s current mortgage expires, she could consider an offset deal, where the money she saves each month can be offset against the mortgage loan.

"While she will still need to withdraw money each year to pay her tax, she could still put £500 aside each month for overpayment," he says. This will have the effect of reducing the interest payable on £67,000 from £36,888 to around £10,804 over the mortgage term. It will also reduce the term of her mortgage from 25 years to around eight years."

Become a limited company

Mr King says Susan should investigate whether she will be better off running her business as a limited company. "A combination of a low salary and dividends could provide a lower marginal tax rate," he says.

Review protection policies

As Susan is self-employed, she will not get any protection cover provided by an employer, warns Mr Connolly. "But rather than personal accident insurance, she should consider income protection, which will provide her with a regular tax-free income if she is off work due to long-term illness or injury," he says.

Mr King adds that she could protect herself for £1,000 a month for a monthly premium of £30. "This policy pays out, tax-free, after the first three months of illness," he says.

Susan could also consider critical illness cover which pays out a lump sum tax-free on diagnosis.

This article was amended on 29 January 2024 to remove the subject’s name.