Wealth Check: A pension dream built on bricks and mortar
Sunday 26 March 2006
The problem: Short-term costs cloud the long-term vision
Aspiring property developer Karin Jones, 36, has plans to build up a portfolio to fund her retirement.
In the short term, she wants to buy a new one- or two-bedroom property with her fiancé so she can rent out her current home - a studio flat in Hammersmith, west London.
"And in the longer term, I want to buy a third property to do up and sell on," she says.
"Eventually, as my retirement fund, I'd like to have a number of properties to rent out."
Since she bought her flat eight years ago, at a cost of £55,000, it has more than trebled in value to around £185,000. She has a tracker mortgage with the Halifax at a rate of 5.7 per cent; the loan is £50,000 interest-only and £10,000 repayment.
But before she can start thinking about building her property empire, Karin has to save for a New York wedding in June, likely to cost around £5,000. Then, once the couple have returned to the UK, they want to have a party. This will cost £3,000 and they hope their families will help to fund it.
As a manager for the Flight Centre travel shop, Karin earns between £35,000 and £42,000 a year according to performance-based incentives.
Her savings include £1,000 in an internet account with Intelligent Finance, paying 4.5 per cent, and £7,500 in an equity individual savings account (ISA) with online stockbroker TD Waterhouse.
However, Karin has £10,000 of debts split between a personal loan and two credit cards.
A £5,000 loan at 6.9 per cent with Northern Rock, taken out 18 months ago to pay for her car, has three years left to run.
On her plastic, she recently moved a balance of £2,500 on to a Virgin card that is interest-free for nine months, but she also owes £2,500 on an HSBC card at a rate of 14.9 per cent.
Karin has paid in to a company pension for three years and currently contributes 6.5 per cent of her salary, while her employer puts in around 3 per cent.
She has no insurance policies.
The cure: Don't rely on property for your retirement
Karin needs to get down to some disciplined budgeting to meet the expense of her wedding and also to pay off her credit card debt, says Julie Hedge at independent financial adviser (IFA) Christie Scotts.
She also urges caution over a property portfolio: "There are still good long-term gains to be made in bricks and mortar, but the best investment strategy is one that doesn't place all of its eggs in one basket."
Ms Hedge recommends Karin build up resources in all "asset classes" - extra pension premiums, ISAs, unit trusts, investment bonds - as well as property.
Karin has done well to amass £8,500 in savings, but given the amount of cash she needs this year alone to fund her wedding and pay off debts, she may have to consider using her savings in the short term, says Ms Hedge.
"If so, she should aim to make a monthly commitment to a savings plan - such as a tax-free mini cash ISA."
The Halifax, for example, pays 5 per cent on its Saver Direct.
"Karin could also move her Intelligent Finance savings into this tax-free account," she adds.
However, Ben Yearsley of IFA Hargreaves Lansdown warns that Karin must first check the status of her equity ISA. If it is a maxi account - allowing her to invest up to £7,000 a year - this will prevent her from taking out a mini cash ISA at the same time.
Karin should try to move the HSBC balance to the Virgin card, says Ms Hedge, but she should ensure that the balance is paid off before this deal runs out. "The interest shoots up to an annual percentage rate (APR) of 15.9 per cent afterwards."
Provided there are no redemption penalties, Mr Yearsley says Karin should shop around for a better mortgage deal with a lower interest rate. "A large part of the home loan is on an interest-only basis," he adds. "She should either start a regular savings plan to pay it off [such as a mini stocks and shares ISA], or change to a repayment basis."
But Colin Rothery at IFA Throgmorton Financial Services says switching to a repayment deal is less necessary if her studio flat is to become an investment - as long as her main residence is on a repayment basis.
He adds that it will be easy for Karin to remortgage her flat to a "let-to-buy" deal (one that lets customers use their existing property to buy a new place while renting it out).
"Today, lots of lenders offer these products at competitive rates. And if she needs a rise in the mortgage, this should be relatively easy to arrange as there's lots of equity in her flat."
Karin should consider raising her contributions, says Mr Yearsley. "As a rule, you should be putting in half your age as a percentage of your salary.
"Karin is 36 and has only been paying into a pension for three years," he adds. "She needs to increase her payments or she will not have built up a big enough pension pot by the time she wants to retire."
Karin needs to think about insurance now she is getting married, says Ms Hedge. "Her employer may offer benefits, so she should check she is getting all she is entitled to."
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