Wealth check: How do I sort out my shambolic finances?

With a new job, a new home - and one lucky old cat - it is time to review chaotic car, pension, insurance and savings arrangements
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The Independent Online

By Ben Chu </3>

Rona Macdonald no longer works for the RSPCA but she has a reminder of her eight and half years there. She lives in a three-bedroom terrace house in Croydon, South London with an RSPCA rescue cat, called Oliver. The 38-year-old public affairs manager was brought up in Peterhead, 40 miles north of Aberdeen but has worked in London most of her adult life.

By Ben Chu </3>

Rona Macdonald no longer works for the RSPCA but she has a reminder of her eight and half years there. She lives in a three-bedroom terrace house in Croydon, South London with an RSPCA rescue cat, called Oliver. The 38-year-old public affairs manager was brought up in Peterhead, 40 miles north of Aberdeen but has worked in London most of her adult life.

Ms MacDonald left her job as a lobbyist for the RSPCA three and a half years ago and now works for BT. "When I worked for the RSPCA we were lobbying the Government on legislation," she says, "but now I'm involved in government procurement deals". She will be moving to a new job soon.

She has PPP cover with her BT job and has an old Abbey Life policy into which she pays £30 a month. "I don't really know why I have life insurance – nobody needs it!" she says.

She separated from her husband after 12 years of marriage 18 months ago. "My biggest financial concerns have been splitting everything up with my husband without paying lawyers any money," she says. "We are now financially separate and I'm beginning to feel like I'm getting back on my feet."

She has a company car, a Rover 75, but she is thinking about coming out of the scheme and buying a run-about. "I don't need a big motor so I'm considering the cash alternative as I hardly do any business mileage," she says.

Ms Macdonald says her pension arrangements are a mess. She has a personal pension with Commercial Union which she started in the early 1990s but does not know how much it's worth. She took out an RSPCA pension which she transferred into her BT pension in 2000. "The whole thing is shambolic and needs sorting out," she says."

Ms Macdonald has £5,000 savings and a few Bradford and Bingley shares. "I want to invest any money or bonuses I get and build up a solid base of savings in case I ever get made redundant," she says.

She bought her house 10 months ago and estimates it to be worth £230,000. She has a £110,000 fixed-rate mortgage with the Halifax. "What sort of mortgage should I go for next year when my two-year deal comes to an end?" she asks.

We put her case to Anna Bowes, a savings and investments manager with Chase de Vere Investments in Bath, Marlene Shalton, a director of Chambers Morgan James in Cardiff, and Charles Ansdell, technical manager of Inter-Alliance Group in London.

Rona Macdonald public affairs manager

Age: 38

Status: separated after 12 years of marriage; no children

Occupation: public affairs manager for BT

Education: SHND in communicatons, and CAM diploma in PR

Motoring: Rover 75 company car

Debts: £110,000 mortgage

Salary: £60,000

Savings: £5,000 (for new fitted kitchen)

Pension: personal pension with CU; BT and RSPCA pensions

Stocks and shares: small number of Bradford & Bingley and BT shares

Property: three-bedroom terrace in Croydon (worth about £230,000)

Outgoings: (per month) mortgage £690; building and contents insurance £25; life insurance (Abbey Life) £30; gas and electric £40; council tax £100; water rates £28; gym membership £44; broadband £30; contact lenses £25; petrol £60; pay-as-you-go phone £30

Solution 1: Car

Ms Shalton says, since April this year, the basis for calculating tax on a company car changed to a percentage of the list price based on the CO2 emission of the vehicle. The maximum charge represents a 20 per cent increase, so in order to keep her tax and NI contribution costs down, Ms Macdonald should opt for not only a smaller car but one that is diesel-fuelled.

Mr Ansdell says moving to a small car should reduce her tax bill. Whether she should do this or take cash benefits depends on factors such as the proposed company car, total budget, personal capital contribution, personal annual contribution, business mileage and proposed cash alternatives. The website www.cashorcar.co.uk offers a calculator facility on whether to go for cash or a company car scheme.

Solution 2: Pension

Ms Bowes says Ms Macdonald should get an up-to-date statement from Norwich Union, part of Aviva, to provide her with an idea of what income her private pension will provide at retirement. She should check the charging structure and if this can be improved and also check the funds into which she is invested.

Ms Shalton says Ms Macdonald needs to determine any shortfall she might have in retirement and how she can make this up by contributing to Additional Voluntary Contributions. She can contribute 15 per cent of her salary into an AVC/FSAVC minus the contribution she is making to the employer's occupational scheme. This will give her 40 per cent tax relief.

Solution 3: Savings

Mr Ansdell suggests Ms Macdonald build up emergency funds of about three months income. £15,000 of this should be easily accessible. The best account to hold these funds is Capital One Tracker Plus which offers 4.15 per cent. Northern Rock Tracker Online offer 4.1 per cent. Both are internet only, so are not suitable for technophobes.

Ms Bowes says Ms Macdonald should investigate her Winterthur policy to see if she still needs life assurance. She could cancel it and redirect the £65 per month into savings. Saving on a monthly basis is a good discipline and if she set up a direct debit it would come out of income almost without her realising it.

Solution 4: Bonus

Ms Shalton says Ms Macdonald could use her bonuses to top up her savings or retirement funds each year. She can invest £,3,000 into a mini cash equities Isa and £7,000 into a maxi Isa.

Mr Ansdell says once she has built up sufficient emergency funds, she should look towards putting lump sums towards paying off her mortgage, if her provider will allow it. If not, she should look to use any bonuses to maximum fund her pension. The law says that, at her age, the maximum she can fund her private pension is 20 per cent of net relevant earnings. There is also an earnings cap of £99,000, meaning the most she could contribute a year is £19,800. A useful trick for her to contemplate is, if she knows she is going to get a bonus, to ask her company to pay it straight into her pension scheme, and to give her the National Insurance they would conventionally have to pay on a bonus. For example, if they gave her a £10,000 bonus, her company would have to pay 12.8 per cent NI Contributions or £1,280 – costing them £11,280 in total. However, if they pay it straight into her pension scheme they don't pay NI Contributions. She can ask them to pay this £1,280 into her pensions scheme, meaning she gets an extra £1,280 and the company still pays £11,280 in total.

Solution 5: Mortgage

Ms Bowes says though Ms Macdonald's two-year fixed rate with Halifax ends next May, it may still be worth her remortgaging now. The potential savings she could make could cover the cost of any penalty. The best-buy two-year fixed rate at present is 3.43 per cent from Kent Reliance.

Ms Shalton says when the mortgage ends she should consider an offset mortgage, whereby she waives the interest on her savings and uses this to decrease the interest rate or the capital on her outstanding loan. Offset mortgages provide a flexible way of reducing the loan over a shorter period.

*If you would like to be given a financial health check-up, write to: Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.

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