Money Makeover: If you have cash, it's best to spread it around
Saturday 06 December 1997
Occupation: Sales and marketing manager for a fashion company.
The problem: Luanne, who is single and has no dependents, earns pounds 20,000 and has hopes of future salary increases with her company. She has pounds 22,000 in a Barclays Bank High Interest Account, pounds 14,000 of which she recently inherited.
She expects to buy a flat although she does not know how much money she will need for this. She might let a room out to a lodger. Luanne does not wish to commit all her capital on the purchase and would like have some funds left to invest for the longer term.
Her employment contract entitles Luanne to sick pay cover of 10 days a year. She is not eligible to join her company pension scheme as it is only available to directors in the firm, but believes she is in a position to make contributions of pounds 150 per month into a scheme.
The adviser: Edward Creasey, client manager at Clark Conway, independent financial advisers, 26 Durham Road, London SW20 0TW (0181-241 1000).
The advice: Flexibility is the key to any advice in this case and therefore I would suggest a split of her capital in the following way.
I would recommend keeping pounds 10,000 in a postal account due to the generally higher rates of return these offer over normal bank and building society accounts. One point worth noting is the relatively little difference in interest rates for 30- day, 90-day and instant access accounts of this type. On this basis, an instant access postal account would seem most appropriate.
When the ideal property is found, capital would then be accessible. The most competitive account at present is offered by Coventry Building Society, which pays 7.10 per cent gross on deposits.
There are one or two accounts offering slightly higher rates but they require a higher balance to be maintained which may not suit Luanne.
I would advise that pounds 9,000 of Luanne's capital is invested for the medium to long term in tax-efficient investments such as Tessas and PEPs. We need to keep in mind that PEPs and Tessas will be subject to changes in 1999.
Both products will be transferable into Individual Savings Accounts (ISAs), subject to a pounds 50,000 top limit.
At present the stock market remains volatile so I would suggest looking at a PEP with a "phasing-in" option. This type of PEP has the ability to spread the investment of pounds 6,000 over a six-month period, so avoiding the commitment of the capital to the market at an inopportune moment.
Fidelity is one company which offers this option along with a wide range of good performing funds. I would recommend that she also considers a Tessa. One of the top interest-paying providers is Principality Building Society, with a rate of 7.65 per cent paid gross providing the investment is left for a full five years. As an alternative, Luanne could consider a fixed interest rate Tessa. One of the best rates available is offered by Birmingham Midshires at 7.05 per cent.
The remaining balance of her capital can be kept in an instant-access account for immediate day-to-day use.
As well as considering Luanne's capital position, thought also needs to be given to protecting her income now and when she retires. She should consider the merits of critical illness and income protection policies. She is young and healthy so the cover should be relatively cheap.
There is often confusion over the differences between critical illness (CI) cover, which pays out a lump sum on the diagnosis of one of a list of critical conditions, including strokes, cancer and heart attacks, and permanent health insurance (PHI), which provides a regular income in the event of ongoing ill health, probably a more pressing need at present.
There is a wide choice of companies offering cover. Care should be taken when choosing a provider as terms and premium conditions vary considerably.
If Luanne is unable to join her company pension scheme for some time, I would recommend a personal pension plan is started sooner rather than later. Delaying the start of a pension can have a substantial negative effect on the benefits received in retirement.
Any contribution she makes would benefit from tax relief at her marginal rate, currently 23 per cent, which means that for every pounds 77 she pays in, the taxman will add a further pounds 23 to her pension.
The Government has indicated that it will soon be announcing details of its new stakeholder pension and Luanne may wish to wait for these developments before committing herself. Whenever she decides to start a pension, I believe she should include waiver of premium benefit in her contract, whereby pension premiums are paid by the insurer in the event she is unable to work due to ill health.
Luanne should look to increase her pension contributions each year in line with inflation, if funds allow. She should also make a will. Even though she is single and has no immediate dependents, a will is the best way of ensuring her wishes are met.
As a final thought, Luanne mentioned the possibility that if she buys a house she may wish to let out one of the rooms.
Let's hope next March's Budget does not change rent-a-room allowances, which allow someone in her position to receive an annual income of up to pounds 4,250 a year tax free.
Such an income can often be the deciding factor when purchasing a first property.
Diving in at the deep end is no excuse for shirking the style stakes
Where should I invest my savings?
Mark Dampier: A safe harbour if the market recovery has overreached itself
'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers
Bargain Hunter: Eurostar offers child fares for £1 each way to Paris, Brussels and Lille
Relaxed pensions rules: Guide to what they mean to you
- 1 Why I'm on the brink of burning my Israeli passport
- 2 War is war: Why I stand with Israel
- 3 L'Oreal cuts ties with Belgium supporter Axelle Despiegelaere after hunting trip photographs
- 5 Iraq crisis: How Saudi Arabia helped Isis take over the north of the country
Sustained immigration has not harmed Britons' employment, say government advisers
War is war: Why I stand with Israel
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Australia facing international condemnation after turning around Sri Lankans at sea
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
iJobs Money & Business
£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...
£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...
£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...
£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...
Day In a Page
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square