Daniel Parsonage, 27, lives in Brighton and works as a project officer for Brighton and Hove City Council, earning a salary of £29,000. Daniel hopes to buy his own home within the next five years, but he needs advice on the best way to put money by for a deposit, especially as he has no savings and has debts totalling £20,000. At the same time, he needs advice on long-term savings too.
We asked three independent financial advisers for their help: Justin Modray of Bestinvest Brokers, Daris McDermott of Chelsea Financial Services and Matthew Morris of RT Financial Planners for help.
Dan Parsonage, 27, Brighton
Personal: Earns £29,000 as project officer at local council.
Property: Hoping to purchase a property in Brighton within the next five years.
Pension: Contributes 2.5 per cent to occupational scheme - this is matched by employer.
Debt: £13,000 student loan and £7,000 with Egg, which charges 6.9 per cent.
Monthly expenditure: Rent: £580, living expenses: £1,000, pension: £60.
Daniel's short-term priority is to build up a deposit to help him get on the property ladder, says Justin Modray. While investing in the stock market is tempting, the risk of losing money is too great. Instead, he needs to stick to risk-free cash.
Halifax Bank's cash ISA, Saver Direct, currently pays a competitive 5 per cent a year in annual interest, Modray suggests.
Daris McDermott also suggests a cash ISA, which enables savers to earn tax-free interest on deposits of up to £3,000 a year. The savings can be used as a fund for the house deposit, but will also serve as an emergency pot of savings.
McDermott suggests ear-marking the equivalent of one month's salary just for contingencies. Once Daniel has boughta property, he should increase the emergency pot to three months worth of salary.
With no savings and an income of £29,000 a year, it is unlikely that Daniel could get a mortgage of much more than £100,000, says Matthew Morris. He should aim to build a £20,000 to £30,000 deposit over the coming years which will enable him to buy a property worth £150,000 to £160,000. To rapidly build up a deposit of this size, Daniel would need to save around about £700 to £800 a month.
As Daniel's priority is getting a deposit together for a house, McDermott would urge him to concentrate on that. Regular stock market savings plans are worth considering, however. McDermott recommends two core cautious funds - Invesco Perpetual High Income and Artemis Income. Both fit Daniel's risk profile and have reputable managers with good track records.
Modray says Daniel's employer will be deducting student loan repayments from his monthly salary. As the rate of interest on student loans is linked to inflation, there's no rush to pay more than the standard repayments, as it's effectively "free" borrowing.
He also has an Egg loan, but this charges a competitive rate of interest.
Modray says Daniel needs to think about his pension. His employer offers membership of the local authority pension scheme, a final salary plan. However, he has to pay contributions of 6 per cent of his salary to join this scheme and he has opted for a lower contribution of 2.5 per cent, matched by his employer.
This gives him access to the employer's money purchase pension plan, where retirement benefits are not based on salary. Instead, his pension will depend on how well the investments in his fund perform
As he's some way from retirement, investment funds with a bias towards global stock markets are the right investments. If he is to retire at 65 on two-thirds of his income he needs to be saving around 17 per cent of his salary each year. This is probably unrealistic but does highlight how he needs to save as much as possible if he's to enjoy a comfortable retirement.
As Daniel earns less than £30,000 he's allowed to contribute up to £3,600 into a stakeholder pension in addition to his occupational scheme. Also, from April, pension rule changes mean he will be free to choose from the whole pension marketplace for contributions outside of his occupational scheme.
As Daniel has no dependants he has little need for life insurance, says Modray. He should check whether his employer will continue paying his income in the event of a long-term illness. If not, he should consider buying income protection insurance.
To provide cover that would pay £14,000 a year once he has been unable to work for six months, Daniel would have to pay a premium of £15 a month.
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