Wealth Check: 'Beware of putting all your eggs in one investment basket'
Saturday 26 December 2009
Kai Winkelmann is studying for a PhD in Biology at the University of Bristol. The 28-year-old, originally from Berlin, came to the UK with the hope of one day becoming a lecturer.
He says: "Biology is my passion – it's something I hope I'll always be doing. My income is modest right now but, once I finish my PhD, hopefully I'll be earning a little more money. My dream is to have an apartment in Nice – any ideas?"
Kai has always lived within his means but now wants to know how to save for retirement. He also hopes to own a property in seven years and thinks it could pay for itself with tenants. With so many options, Kai has no idea where to start. Here to help him this week are Danny Cox from Hargreaves Lansdown, Dennis Hall from Yellowtail Financial Planning and Mark Wapshott of St Edmundsbury Financial Services.
Case notes: Kai Winkelmann, 28
Salary: Kai earns £15,000 per year, and this sum is not taxed
Monthly outgoings: £1,071
It is easy to be seduced by the South of France but obtaining a mortgage abroad can be more expensive and difficult to arrange, according to Cox. He says: "If Kai plans to stay in the UK, he might be better to buy a UK property as a home. The money he is currently spending on rent would be used toward meeting mortgage costs."
If Kai were to live in the apartment himself, he would reduce investment risk and cut out capital gains tax because the flat would be classed as his private residence.
Cox warns that letting out a property is one of the least tax-efficient ways to invest. It also comes with high transaction costs, and there is no way of guaranteeing tenants. Hall agrees that buy-to-let is not a sensible option for Kai, as it is best to spread money across several different investments.
"I would be wary of putting all eggs in one basket," he says. "Concentrating on a single asset class would be a mistake as it increases risk. In the short term, steps should be taken to build up savings in a variety of asset classes."
He recommends collective investments, which allow savers to deposit small amounts of money which are then invested across a wide range of projects.
Savings and investments
Kai has a little extra to spare each month from his scholarship, and the experts agree he would be smart to start putting this aside to save for a deposit on a property.
Cox says: "Kai should think about how much the property might cost and the amount of deposit he might need. This provides him with a target to aim for. Perhaps the most important part of saving is to start, even if Kai cannot save as much as he would like. Over time, particularly when he starts to earn, he should be able to save more."
Although Kai is not liable to pay tax now, he will when he starts a job. Cox recommends a cash ISA, where he can deposit money tax-free.
Wapshott also recommends a stocks and shares ISA, and thinks using a fund supermarket like Fidelity's Fundsnetwork or Skandia Investment Solutions might help Kai to get the best deal.
He says: "The main reason for using a supermarket is the wide range of funds available from all the major investment houses, often with a discount and also the ability to access your funds on the internet.
"All the funds have a risk rating, therefore a choice is available to match Kai's attitude to investment."
In the short term, Wapshott says Kai must set up a British savings account for day-to-day expenditure, if he hasn't already done so. As a non-taxpayer, he should fill out an R85 form, which will mean he can earn interest without paying tax.
Kai loves to travel and has no idea where life will take him. Hall says it is best for him to decide where he wants to settle down before committing to a pension scheme in any particular country.
He says: "Although it is possible to make pension contributions in the UK even if not earning, is this going to be the most appropriate thing to do?
"If you are not yet completely sure of your future plans it doesn't make sense to commit to long-term plans that could turn out to be very small in value."
However, Wapshott thinks Kai could start a pension while remaining flexible. He says: "Although Kai may retire abroad, to France, any funds built up could follow and be paid in most of the world."
Kai would need to seek further advice on how to access those funds but could probably transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS), which is available to anybody who intends to retire abroad.
For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email firstname.lastname@example.org
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