Wealth Check: 'How can I get the best deal from my savings, and an income if I'm ill?'
A freelance writer who cashed in on the Olympics asks our experts to open a new chapter for her finances
Sunday 28 October 2012
Sally Howard, 35, from Stoke Newington, north London, has recently become a freelance writer and wants advice on organising her finances.
She earns around £34,000 a year, and receives a £3,000 boost to this sum from letting her property while working abroad.
"I need my savings to be accessible to ride the highs and lows of freelancing," she says. At present Sally concentrates on easy access accounts to ensure she has money to dip in to when needed, and to save for her tax bill.
She has £4,000 in a Smile individual savings account (ISA) paying 0.5 per cent, and £3,000 in an easy access savings account with the same provider paying 0.25 per cent.
"I work abroad for several months a year and when I do I let my apartment," she says. "For example, I let it for £900 a week during the Olympic Games and paid this cash into my bank account."
Sally owns a one-bed maisonette, bought for £235,000 last year, putting an £150,000 inheritance down as a deposit. This leaves her with £410 a month in repayments for an £85,000 mortgage over 25 years on a two-year tracker deal with Nationwide. This is pegged at 2.58 per cent above the base rate, giving a payable rate of 3.08 per cent.
"I've been advised to reconsider this rate next year, but have no idea what deal I'll opt for then," she says.
As Sally concentrates on cash savings, she pays £100 a month into a personal pension with Fidelity. She has been contributing for six years, and the pension fund is currently focused on emerging market funds. "I was invested in commercial property but decided to go for a more medium-risk approach," she says. "Currently the pension is worth about £10,000."
Making sure not to get saddled with debt is a priority for Sally. "I use a Barclaycard every month, but only for hotel costs, and repay this in full," she explains.
However, as Sally was recently ill and unable to work for two months, she ate into her savings and this made her consider getting a protection policy should this happen again. "But I've never been convinced by these so would like to know what would be recommended for me," she says.
Setting aside regular cash savings while self-employed is wise, our panel of independent financial advisers (IFAs) stress. This is essential for emergencies, and also to meet Sally's tax bill. However, given her status it is important to also consider protection to cover outgoings if she was to fall ill again.
The advisers recommended shifting all savings into an ISA for tax efficiency. However, better rates can be obtained elsewhere.
For example, the Post Office is currently offering 3.01 per cent on its ISA, says Lorreine Kennedy, from Carematters, and will accept transfers from other providers. This account allows up to two penalty-free withdrawals a year.
Sally could move her current ISA to a different account paying a better rate, whether this one or another offering unlimited withdrawals, and add the £3,000 currently in the easy access account. She is able to contribute up to £5,640 a year to a cash ISA, so this is well within her limit.
It is important that savers realise cash ISAs can also be easy access, and given their tax advantages are worth considering before other accounts, provided you stick within the allowance.
For Sally, life cover is unlikely to be a priority, unless she has children, but income replacement can be invaluable, stress the advisers. As a priority, they recommend speaking to a specialist broker such as Lifesearch to see what policies are available.
Ms Kennedy says: "Sally isn't sure of the value of this cover, but it seems she is confusing income replacement with accident, sickness & unemployment benefit. This is a form of income protection plan, designed to cover specific bills such as mortgage payments for a short period of time, and for a self-employed person it can be quite difficult to claim the benefit."
However, income protection provides an income until retirement in the event of being unable to work for a prolonged period due to long-term sickness or disability.
"This type of protection is invaluable for single people who do not have another income to rely upon," says Philip Pearson from Southampton-based P&P Invest.
Sally can choose the amount of income she wishes to protect – for example, a percentage of her annual income or a specific amount – to give enough to cover her main household bills.
For example, if she wanted to provide, say, £17,000 worth of income each year, the cost of a plan would be £22 a month (or £29.72 if she is a smoker) through Exeter Friendly.
Monthly benefit is paid 13 weeks after the illness starts, so Sally would still need to use some of her income to cover the first two months of sickness.
In addition, add the advisers, this December, the EU's gender equality legislation comes into effect. This means that insurance companies can no longer use gender to calculate premiums.
"And it makes it likely that the cost of financial protection for women will increase after this, so Sally should get her skates on," says Ms Kennedy.
Moving on to Sally's mortgage, she should speak to her current provider to see what deals they offer.
Duncan Carter, from Clearwater Financial Planning, says: "These can then be compared with the whole of the market taking into account Sally's preferences."
Depending on her view on when interest rates will eventually rise she may want to consider a fixed rate for the security of fixed monthly repayments, the advisers say.
Mr Carter adds: "The mortgage market is currently fickle with deals coming and going rapidly but she is generally in a good position because of the amount of equity in her property."
However, the administration fees that lenders are charging for their best rates are considerable, so Sally should do her homework.
Ms Kennedy says: "Her income may fluctuate, but when she has good years, or the extra income from renting, she may want to increase the payments to reduce the debt."
The boost from renting out her property while away will fall under the rent-a-room scheme, letting Sally earn up to £4,250 a year tax-free, add the advisers.
Sally's pension should be reviewed to ensure that charges and performance are competitive.
Mr Carter stresses: "Given Sally's small contributions the impact of charges is really important.
"I would look for low-cost, diverse asset classes or passive funds initially and possibly incorporate active or specialist funds later."
Ms Kennedy adds: "At age 35 a minimum of 10 per cent of her taxable income needs to be allocated to the pension to have any hope of building up a fund sufficient for a reasonable income in retirement."
Pension contributions attract tax relief, but alternatively a stocks and shares ISA could be incorporated to add flexibility to Sally's retirement planning.
Do you need a financial makeover?
Write to Julian Knight at:
The Independent on Sunday, 2 Derry Street, London W8 5H
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