Wealth Check: 'Freedom and security - can I have it all?'
Each week we give 'Independent on Sunday' readers a financial makeover
Sunday 12 September 2004
Sally Cornford is keen on taking a career break and going travelling, but she doesn't want to leave her financial future hanging in the balance.
She also wonders whether she would be better off changing the financial arrangements for her flat. She recently bought a two-bedroom £120,000 home in St Albans via the Homebuy scheme. Her local Stort Valley housing association owns 25 per cent of the property and she is thinking of saving up to buy it out. Sally has a £90,000 three-year fixed-rate deal at 5.14 per cent on the remaining portion with Britannia building society.
"In the long term, I'd like to buy out the housing association and keep the flat as an investment," she says. "However, I don't know how best to save enough to do this."
She has accumulated £1,000 in savings so far, earning 4.5 per cent in an Egg online account. But she owes Egg nearly £4,000 on a personal loan with an annual percentage rate (APR) of 7.9; she repays £126 a month.
Her pension provision is going well. As a civil servant, she is a member of a non-contributory final salary scheme, which means there is no need for her to pay into her retirement fund. The equivalent of about 7 per cent of her annual salary is being paid in. Two years ago her pension projection was £10,194 a year, with a £28,502 lump sum payable upon retirement.
To get the full benefit of such a generous scheme, Sally is also buying "added years" and considering extra investment through additional voluntary contributions (AVCs) with either Scottish Widows, Standard Life or Equitable Life.
She is also keen to start investing in individual savings accounts (ISAs), particularly ethical or "green" funds. However, there is a caveat: "I would want the green investment to be competitive; I wouldn't want to miss out entirely on growth elsewhere in the stock market."
She would also change her Barclays account if a bank with a more ethical approach could be found.
Interview by Sam Dunn
Sally Cornford, 31, from St Albans. Job: civil servant. Income: £23,000 to £25,000. Savings: £1,000 in an Egg online account. Investments: none. Goal: to protect her financial future and finance a career break.
Before Sally can start setting money aside, she needs to decide which financial goal to target, because of the differences between saving for the long and the short term, says Anna Bowes of independent financial adviser (IFA) Chase de Vere.
Philippa Gee of IFA Torquil Clark agrees and suggests a financial "detox" that first pays off the loan and then channels her cash into a mini cash ISA.
For an ethical stance, Sally should consider the Isis Stewardship stock market fund, advises Ben Gibbs of IFA Glazers Financial Services.
Ms Gee also recommends that Sally check the Co-operative Bank's ethical policy on its website before switching to its current account.
It makes little sense for Sally's £1,000 Egg savings to be earning just 3.6 per cent after tax, when she is paying 7.9 per cent interest on her £4,000 debt, says Mr Gibbs.
"Unless the penalty for paying off the loan is very high, she is better off using her savings to clear part of it."
Ms Gee estimates that, by drawing up and sticking to a tight budget, Sally could afford to earmark £300 a month for clearing her debt. "I would hope that over a 12-month period, the debt could be wiped out."
Sally needs to decide how quickly she'll want to get her hands on the money she saves once the debt has been cleared; her choice of product will depend on it.
"If she hopes to travel in anything less than five years, she needs to invest as much as she can afford in cash products," says Ms Bowes.
A mini cash ISA such as Abbey's postal account, offering 5.35 per cent interest, will let her savings grow free of tax, she adds. Once her £3,000 annual limit is used up, she should find a higher-paying savings account.
Sally's Egg internet account already pays a decent rate but better deals are out there. Ms Bowes recommends Birmingham Midshires, which pays 5.4 per cent interest (although this includes a 0.45 per cent bonus for 12 months).
If Sally decides that buying the housing association's share of her flat is a priority, she should consider investing money in stocks and shares ISAs.
With an eye on her ethical preference, she could try the Isis Stewardship Growth or Standard Life UK Ethical fund, suggests Ms Gee, or the Artemis Multimanager Ethical fund. "It has higher charges but has exposure to a variety of ethical funds that are constantly reviewed and analysed," she adds.
If Sally puts less than £3,000 into a mini cash ISA, she can invest up to £3,000 in a mini equity ISA in the same tax year. This will enable her to build up a deposit for the long term. But she needs to be realistic about how long it could take to achieve such a sum - perhaps as much as l0 years, Ms Bowes adds.
Since she is single with no dependants, Sally has no need to take out life insurance to pay off her mortgage if she dies before the end of the term, says Mr Gibbs. But as a civil servant, if she was off work due to a long-term illness or disability, she would be entitled to six months' full pay, followed by six months' half pay.
Sally is lucky to benefit from such a final salary pension, and Ms Gee says she has no need to invest in AVCs. But if she insists on going down this route, Ms Bowes suggests choosing either Standard Life or Scottish Widows.
If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email email@example.com
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