Wealth Check: 'How I can keep my savings safe – from myself?'
Saturday 05 September 2009
Mark Baker, 30, is a trainee accountant who lives in Sale, Manchester. He has two main financial goals: to save up enough for a deposit on a house in the next few years, and to retire at 65 while maintaining his current standard of living.
Mark says: "I want to put away enough money each month to save for a deposit, putting it in a place where I won't be tempted to dip into it.
"I've also opted into a pension scheme at work, as it would be nice to retire at 65 and maintain the same standard of living as I have now. If I can save towards that without impinging on my current standard of living too much then I would do it."
Advice this week is given by Philip Pearson of P&P Invest, Flora Maudsley-Barton of Parsonage and Danny Cox of Hargreaves Lansdown.
Income: £23,500 per year
Monthly outgoings: Tax and NICs £462, living expenses £950, holidays £1,000 per annum, pension (taken at source) £78 (total: £18,880)
Debt: £6,000 with car finance deal, £6,000 student debt that he is paying off steadily and isn't too concerned about.
Savings: £5,000 in current account, £250 in a cash ISA and £7,000 in an old pension policy through an ex-employer.
Mark's main goal is to save up a deposit for a house. Danny Cox says his first step should be to set himself a savings target: "This should be based on the amount he will need as a deposit in say, three years' time. For example, if he needs a further £10,000, he will need to save just over £275 per month (ignoring interest)." Cox emphasises the importance of Mark setting a target that is meaningful, but not so high that it is unachievable.
Flora Maudsley-Barton predicts a period of cautious lending ahead, and advises Mark to assume that mortgages won't become much easier to find than they are now: "Mark will need about £20,000 in his pocket to buy a £100,000 property, plus about £1,500 for the buying costs such as legal fees and surveys.
"There may be shared ownership schemes, or other methods for borrowing more, but the more he saves now, the more choice he will have. £390 per month would provide £14,040 plus interest in three years."
Philip Pearson advises Mark to analyse the way he saves: "A budget is critical for anyone wishing to accumulate saving over the short, medium or long term. Mark should keep a close check on the amount he spends each month by making an entry in a diary on a day-to-day basis."
Philip Pearson recommends the Halifax Regular Saver Account to provide discipline towards short-term saving. He says: "It provides a fixed rate of interest of 5 per cent gross over a 12-month period, for a saving commitment of between £25 and £500 each month. When the account matures at the end of each year, the capital should be allocated to a cash ISA to provide a tax free route towards building up capital."
Maudsley-Barton adds that a stocks and shares ISA would be a tax-efficient way to explore investments: "If Mark wanted to earmark some of his savings for the long term, Jupiter's Merlin Income Portfolio is worth a look for new investors who are only saving enough for a simple solution, but want a broad investment."
Pearson also has tips for keeping the funds at arm's length, something Mark wishes to do so he is not tempted to dip into his savings in the short term: "A Fixed Interest Account over a three-year period with the Principality Building Society is paying 4.2 per cent interest. The account accepts transfers in from previous cash ISAs allowing a tidying up of Mark's existing old cash ISA into a single account."
Cox adds that although Mark's debts aren't substantial, he should keep an eye on them: "Mark also needs to be mindful of his car loan. Currently on interest-free credit, if interest does become payable he should repay this loan quickly."
Mark pays £78 each month – 4 per cent – into a defined contribution scheme at work. He has been doing this for the last eight months, and the scheme allows him to retire at 65, which is his second main financial goal. He also has £7,000 from a pension scheme with an old employer.
Danny Cox outlines a number of options regarding the old pension scheme: "One is to leave it where it is. Unless there are guarantees that might be lost or high penalties for transferring, I favour moving this scheme. Mark could transfer the £7,000 into his current employer's scheme, or perhaps to an alternative that may have better investment choices, such as a low-cost SIPP.
"Mark needs to check his options carefully and if he does decide to leave the old pension where it is, he must make sure that he keeps them informed of changes in address."
Flora Maudsley-Barton says Mark would probably be able to pay an extra £20 to his current pension without it affecting his monthly payslip too much.
Philip Pearson acknowledges that saving up for a house is Mark's primary financial goal, but stresses the importance of thinking about his pension now.
He says: "Once Mark has got the deposit needed to fund his house purchase, he should concentrate on his pension. Although this is a long-term project, it is vital to ensure that adequate funding is undertaken in the early years to enable a sufficient fund to be built up."
For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email email@example.com
To find an independent financial adviser in your area, visit www.unbiased.co.uk
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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