Wealth Check: Can I fit short-term plans around long-term needs?
A debt-free freelance writer hopes to be able to buy a house later this year, but is worried that she is neglecting her pension
Sunday 06 March 2011
Kate Pettifer, a writer and editor from Enfield, north London, decided to go freelance two and a half years ago, and while she loves the lifestyle, she's keen to get to grips with the financial implications of being self-employed.
The 37-year-old is in the fortunate position of having no debts, and is disciplined about slotting money away, but admits she does dip into these funds from time to time.
"I pay a fixed sum of £250 a month into a Lloyds TSB Monthly Saver account paying 2 per cent, and currently have £1,000 saved up," she says. "I did have money saved in a number of other accounts, but cleared these out to pay for Christmas, as well as a couple of ski holidays. I also have a Halifax Direct ISA, but haven't quite got around to paying into this account yet. I realise it makes no financial sense to have an empty ISA when I've got accounts that I'm paying tax on – and want to address this as soon as funds allow."
Aside from this, Kate also has £20,000 saved in a fixed-term bond with Santander paying 2.8 per cent; this is due to mature this September.
"This was the equity I got when I sold my house last August," says Kate. "Since selling my house, I've been renting a one-bed flat, and currently pay £800 a month in rent – plus bills. However, I hope to get back on to the property ladder either later this year or early in 2012."
Kate has money saved in two pensions, but neither of these have been active since she became self-employed.
"When I worked for a publishing company, I paid into a Friends Provident New Generation personal pension plan which was part-subsidised by my employer," she says. "I also paid into the BBC final salary scheme when I worked there. At the end of last March, the transfer value of the Friends Provident pension was £22,438, and the BBC scheme was worth £8,400."
Kate is keen to sort out her pension situation but is unsure whether to transfer one or both of her inactive pensions elsewhere. "Ideally, I'd like to find a product that would offer flexibility, as my income fluctuates from month to month," she says. "I'd also like to understand a bit more about the State Earnings Related Pension Scheme (Serps), as my pension provider keeps sending me letters about opting back in."
At present, Kate has no protection policies in place.
Our panel of independent financial advisers (IFAs) agree that as Kate plans to buy a home this year or next, she needs to focus on building up her savings in accounts which offer flexibility. They also point out that her long-term goals should not be forgotten.
Building up savings
As Kate will need to use her savings to help purchase a property, she is being sensible by keeping the money in cash so it cannot fall in value.
"Kate realises it makes no sense to save into a taxed account when tax-free ISA allowances are available, so I'd recommend she switch the £1,000 in the Lloyds TSB account into a cash ISA, and re-direct her £250 monthly payments into the ISA too," says Duncan Carter from Clearwater Financial Planning. "Yorkshire building society is paying 3.5 per cent on its ISA which is fixed until April 2013, so this might work, depending on when Kate wants to re-enter the property market."
Alternatively, the current instant access "best buy" Isa which permits transfers in is the Direct Reward Isa from the Halifax paying 3 per cent.
Kate could also look at making additional savings into her cash Isa once her fixed-rate bond matures – if the proceeds are not then required.
Back on the property ladder
While Kate is keen to buy a property in the next 12 months or so, she will need to find out how well-placed she is to secure a mortgage based on her earnings and employment position, says Mr Carter.
"The mortgage market is still quite tight, and especially for first-time buyers which Kate has once again become," he says. "Having the £20,000 in equity will help, as will building up further savings, as the best mortgage deals are generally available where the loan-to-value (LTV) is 70 per cent or lower."
Planning for retirement
As Kate is now self-employed, she will no longer benefit from employers' contributions to her pensions – so she needs to take responsibility for this, says Mr Connolly.
"It's easy to delay making further pension contributions, especially if you have short-term priorities, such as saving for a new property," he says. "But the more you delay, the bigger the potential impact on your standard of living in retirement."
If Kate is looking to begin making pension contributions again, the Friends Provident pension is a good starting point, according to Mr Connolly. "It is likely that charges on this will be competitive and there will be a reasonable range of Friends Provident and external fund options for you to select from," he says. "You should also be able to increase or decrease contribution amounts without penalty, and access details of your scheme and make changes online."
He adds that Kate should not consider transferring her BBC pension without taking professional advice. "Final salary schemes have valuable guarantees which will be extremely difficult to replace," he says. "In the overwhelming majority of cases, the best advice is to stay put."
Nick Evans from One Life Wealth Planning adds that it's important for Kate to be clear about what she expects her pensions to do for her. "Think about when you'd like to start drawing benefits and what sort of income you want to plan for," he says. "Make use of one of the online pensions calculators to get an idea of how much you need to be saving to reach your goals."
He also points out that uncertainty over Serps – re-named the State Second Pension (S2P) in 2002 – may be short-lived. "The Government has confirmed that the option to contract out of Serps will be abolished from 6 April next year," he says. "That said, reduced rebate levels, investment returns and annuity rates mean that contracting out is now far less likely to be the attractive proposition it once was."
Look at others investments
While pensions are an important way to save for retirement – and benefit from initial tax relief on contributions – they are inflexible. For many people, the best approach to retirement saving is a combination of pensions and Isas," says Mr Connolly. "You should look at saving into a stocks-and-shares Isa as well as a pension. I would suggest using a fund platform, such as Cofunds, which provides access to a wide range of funds, and recommend saving initially into diversified investment funds, such as Investec Cautious Managed, or M&G Global Basics."
Consider income protection
As Kate has no dependent children and no debts, she has limited use for life insurance, according to Mr Connolly.
"However, as you are self-employed, you are unlikely to benefit from any payments from an employer if you are off work due to illness or injury," he says.
"You may wish to consider some form of income protection which will help to cover ongoing commitments, such as your rent or a mortgage."
Do you need a financial makeover?
Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF
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