A year ago, Natalie Murray, 25, took a leap of faith, giving up the security of full-time employment to become the proprietor of a community magazine in her home town, Rugby.
With a successful first year under her belt, Natalie's financial concerns are no longer about making enough to live on, but her long-term security. Although she has a young family, a business loan to pay off and is still at least 35 years from retirement, Natalie's most pressing concern is restarting her pension contributions after a 12-month gap.
"I have previously paid into pension schemes while I was in full-time employment, but at present I do not participate in any pension schemes and this does worry me," Natalie says. "My aim is to start paying an affordable amount into a pension scheme, but I have no idea what is the best option for myself and my family."
Natalie was right to begin saving for her retirement from a young age, our panel of independent financial advisers agree. It will mean that relatively small monthly sums plus the annual returns on that investment could eventually create a significant pension pot without the need for huge contributions later in life. However, with a young family to consider, outstanding debts and precious little savings, the advisers urge her to focus on their short-term financial security first.
"While starting pension contributions at an early age is usually a good financial strategy, Natalie should also think about repaying her expensive debt and creating an emergency savings fund," warns Martin Bamford, of Informed Choice, an independent financial adviser. "This is particularly important as she has a young child and runs her own business. The normal rule of thumb is to save the equivalent of three months' typical expenditure as an emergency fund. In Natalie's case, I think she should aim to put away more – possibly as much as £10,000 – before she starts saving for retirement."
Savings and debt
Natalie and her husband, Edmund, have carefully saved into their son Oliver's child trust fund every month, but have no savings of their own. But they do have debts – a four-year business loan with Lloyd's TSB charging 8.3 per cent interest a year, and a mortgage on the couple's home.
If Natalie is serious about getting her family's financial well-being in order, she ought to undertake a full review of her current levels of income and expenditure, says Marc Ruse, an independent financial adviser for Fiducia Wealth Management.
"She should project her likely expenditure forward and take into account things like education costs, and moving home to give her a much better feel for her family's future financial needs.
"There is nothing particularly complicated about building a financial plan," he says. "It's about working out how much Natalie can afford to reduce her standard of living today, in order to improve it in the future. In some cases, that's just not possible, in which case there really is a risk of retiring into poverty or at least relying on future improvements in your income to be able to save for old age. The problem with that approach is that most people leave it until the kids have left home and the mortgage is repaid to start thinking about their retirement – by which time, it's too late."
"It is good to hear that Natalie has established the need to make provisions for her retirement," agrees Anna Sofat, an independent financial adviser for Addidi Wealth. "She wants to retire on an income of £1,500 a month. So, based on current tax rates, she would require a gross income of around £25,000 a year at 60. This means she will need a fund of approximately £500,000 at 60 – this would give her a level pension of around £28,000 a year or £16,000 a year if it is linked to inflation."
Just how much Natalie needs to save a month will depend on how much she expects her investment to grow every year. Assuming her pension fund grows by 3 per cent after inflation and management charges, she will need to save £706 a month or £8,472 a year. But if she took a little more risk, and her fund grew by 4 per cent, she would need to save around £577 a month, Ms Sofat says.
"When it comes to what she can actually afford to save, Natalie has around £500 a month that she could put towards her goal. But despite her ambitions, Natalie is still young and flexibility in her finances is important for a young family. Pension savings would be locked in at least until she is 55, so I would suggest that she commits at minimum of £250 a month and increases that pension contribution by the rate of inflation at the very least every year," Ms Sofat says.
As for where that money should be invested, Natalie could look at a cost-efficient plan such as a Stakeholder pension. Scottish Widows and L&G are both popular choices because they offer a good range of funds to choose from.
"Many managed funds do not manage to outperform the markets, so unless Natalie is going to review her investment funds regularly, I suggest she opts for passive/tracker funds," Ms Sofat suggests. "Given her age, I would suggest that she looks at 70 per cent equity (35 per cent in the UK and 35 per cent overseas) and 30 per cent in property. Both L&G and Scottish Widows provide a decent range of passive funds and property funds."
"In addition to retirement income from any pension contributions she starts to make now," says Mr Bamford, "Natalie should also look at her previous pension benefits to find out what level of income these could provide and factor in any state pension income, although this is unlikely to be available until at least her 68th birthday under current proposals from the main political parties."
All three advisers urge Natalie to make a will to ensure her assets are distributed as she wishes, rather than simply as the law dictates. Equally, Natalie and Edmund should ensure some assets are held jointly so they can be accessed quickly in the event of death and passed on or sold as necessary. But above all, the couple should choose a guardian for their child in case both parents die early. Guardians can only be designated via a will, which could prevent huge problems and upset later.
It is reassuring that Natalie has life insurance that will pay off the mortgage if she dies young. But she should also consider an income protection policy. This would pay her a benefit every month to go towards all her costs (not just the mortgage), and would pay out in case of an accident or long-term illness that meant she was not able to work, or if she lost her job. Unlike other insurance policies that will only cover her for a year or two, income protection would pay out if necessary until retirement. A policy paying £1,500 a month, for example, could cost around £23.50 a month in premiums.
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