Wealth Check: 'How can I manage a pay cut?'
Saturday 18 December 2004
Nick Boyes works as head gardener on a large site. The business will move to London next year and he will be redundant.
Nick Boyes works as head gardener on a large site. The business will move to London next year and he will be redundant. He accepts that he may have to take a drop in salary of £3,000 or more in a new job, and go without rent-free accommodation, but he is looking for a new post with a tied house.
He is in a relatively strong position. He has a decent pension and has built up his savings. He will be entitled to redundancy payment, and he has plenty of notice before his job and tenancy end.
He wants to know how best to manage his savings and investments to tide him over. He could work anywhere in the country and might consider working for himself. But as he has lived in tied accommodation for so long, he has no property. Is it feasible to buy a home, or could buy-to-let be an option if he finds work with a tied house? Should he trim his investments to provide a better cushion in a new job? As he is not too far off retirement, could his pension be a tax-efficient way to save some redundancy money?
We put his case to Jennifer Storrow at Gee & Company, Anna Bowes at Chase de Vere, and Matthew Pitcher at Towry Law.
NICK BOYES, 53, HEAD GARDENER
Salary: £25,000 plus rent-free accommodation.
Debt: None, but expects to take out 0% loan to buy a new car.
Property: None. Lives on-site.
Savings: Two £3,000 mini cash Isas: Intelligent Finance and C&G. £10,000 premium bonds. £5,000 National Savings and Investments index-linked certificates. £3,000 with Alliance & Leicester.
Investments: £250 a month into Sterling managed stocks and shares Isa.
Pension: Scottish Life, converted two years ago from final salary to stakeholder.
Outgoings (monthly): Bills £250. Food and other expenses £250. Sky £50.
SAVINGS AND BORROWING
Mr Boyes is holding a lot of cash at the moment, but given the uncertainty about his future, this is understandable.
Ms Bowes says the accounts he has are relatively efficient, except for the premium bonds; £10,000 is a large commitment, and he may be able to do better with a more conventional savings account or investment.
Ms Storrow agrees that Mr Boyes is holding more cash than she would normally advise, although he may need a cash reserve to tide him over while looking for work, or if he decides to set up in business for himself. Meanwhile, he should keep an eye on mini cash Isa rates to ensure he is getting the best rate.
Regarding his plans to take out a loan for a new car, Mr Pitcher says that Mr Boyes should look at the terms with care. If it has an interest-free period, he needs to make sure there are no penalties for paying off the loan when the free period ends; he has enough cash to do this. Buying the car in cash might be a better choice.
Ms Storrow says that at his age, Mr Boyes can put 30 per cent of his income into his pension, including his, and his employer's, contributions. He can still pay into a stakeholder once he moves jobs, but she suggests diversifying and taking a new plan with a different provider, rather than converting his Scottish Life plan to a personal stakeholder pension.
Ms Bowes points out that from 2006, Mr Boyes will be able to put his entire salary into a pension. But pensions remain an inflexible investment vehicle, as 75 per cent of the fund must be used to buy an annuity. To check how much he is set to earn on retirement, Mr Boyes should ask for forecasts from both his private pension and for the state pension: the Retirement Forecasting Team can be contacted on 0845 300 0168.
Mr Pitcher suggests that if Mr Boyes was persuaded by a financial adviser to transfer money from his final salary pension to a private plan - rather than simply freezing contributions to the final salary scheme - he may have received inappropriate advice. This is because final salary benefits are usually greater than those from personal pensions. He should check the paperwork, as he might have grounds for a complaint.
If Mr Boyes has a redundancy settlement of more than £30,000 - the tax-free threshold - then the most tax-effective way to deal with any excess would be to pay it into his pension.
Renting will offer Mr Boyes the most flexibility for now, but it is also an open-ended commitment and can become a bind in retirement. With his impending redundancy, he might have problems finding a mortgage at the moment. But Ms Bowes suggests that he may be able to purchase a buy-to-let property, as long as he has a 15 per cent deposit. He could then live in the property on retirement. Mr Pitcher calculates that a buy-to-let mortgage would cost £700 a month, based on a £100,000 house with a £70,000 mortgage. To finance this, the rent would need to be at least £600 a month. Costs would be marginally lower if he bought a property to live in; both cases are based on an 11-year mortgage, so Mr Boyes would be debt-free at 65.
Ms Storrow says that property is not a guaranteed investment, and buy-to-lets can have problems with tenants, or un-let periods. But as Mr Boyes has no property of his own, it could still be a sensible option. He should buy locally and manage the property himself.
* If you would like a free financial check-up, which will appear in the Wealth Check column, write to The Independent, 191 Marsh Wall, London E14 9RS, or e-mail email@example.com.
Advisers' views are given for information only
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