Wealth check: How to save now that the hard times are over

A small-business owner wants to buy a cottage for his mum and pay off the mortgage. Harriet Meyer reports
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The Independent Online

The patient

After building a successful business and paying off debt, Brad Burton is keen to make the most of his money.

"I want to provide a quality standard of living for my family," says Brad, 37, who lives in Chedzoy, Somerset, with his wife and three sons. "They've stuck with me and believed in me while I was starting a new business and things were tough, and I want to reward them."

Brad set up 4Networking, a business networking company, four years ago. He also works as a motivational speaker, and wrote Get off Your Arse, a business motivation book.

"At one stage, I was delivering pizzas for £6 an hour just to make ends meet while setting up the business. And before this I was sales director at a publishing company, though I became disillusioned," he says. "But now I have a good income and want to maximise the benefits of this."

He currently earns about £100,000 a year, and has started slotting away a small sum in savings for a rainy day. He has £5,100 in a cash individual savings account (ISA) with Santander, paying 2.75 per cent.

As for previous debts, these are all paid off. "But it wasn't that long ago that I was £25,000 in the red," he says. "I had a number of credit cards and a personal loan. Paying these off felt strange because I'd been in debt my entire life; my finances had always been about fighting the debt mountain. But now I'm accumulating wealth."

Since starting the business, he has bought a five-bed house, and pays about £1,300 a month for a £285,000 repayment mortgage with HSBC over 25 years, on a lifetime tracker pegged at 2.19 per cent over base rate, currently 2.69 per cent.

"We bought the property six months ago, with a £180,000 deposit and £285,000 mortgage," he says. "We're hoping to pay the whole mortgage off in seven years as there are no repayment penalties then." The property is worth about £460,000 at present.

His other goal is to buy his mother a house. "As a child, I promised mum I'd buy her a cottage, and I really want to come through for her on this," says Brad. "She is 66 and lives not far from us. This is something I'd like to do soon."

At present, he is not paying into a pension. "While I've been building up my business, we have been living hand to mouth, and it's only now that I have the kind of income that will allow me to consider a pension and secure the future," he says.

For protection purposes, both he and his wife have single life insurance policies with Aviva, paying £35 a month for £250,000 worth of cover each.

The cure

Brad is reaping the financial benefits of his new business after spending time in the red, buying a dream home and planning for the future.

"But he must draw some lessons from the recent credit crunch if he is not to revisit those debt-ridden days," warns Darius McDermott from independent financial adviser (IFA) Chelsea Financial Services.

"The primary lesson learnt from the economic fallout is the danger of overextending oneself. He might have a relatively large income, but that could change."

He must ensure that he underpins his success by building a cash buffer and providing sufficient protection cover for his family, stresses our panel of IFAs.

Protection

The life cover currently in place isn't enough. If either Brad or his wife were to die, the policies wouldn't repay the mortgage debt, let alone provide additional funds for the family.

"They need to think about the amount of income the family would need in the event of Brad's death," says Dan Cox from IFA Hargreaves Lansdown. "A family income benefit policy is potentially a good solution as it pays a tax-free income on death for the remaining term of the policy."

Brad could also opt for critical illness cover. "This type of cover is often overlooked, but the family could suffer considerable hardship in the event of Brad being unable to work through long-term illness," says Lorreine Kennedy from IFA Carematters. "It may be that Brad's business would continue to provide him with an income, but he should seek advice on appropriate levels of protection anyway."

Savings

Once Brad has put in place some financial protection for his family, he should aim to build up an "emergency fund" of at least three months' salary – the ISA makes a good starting block for this goal.

After building up his cash pot, he could consider an investment ISA. "If he is not risk-averse he has sufficient time before retirement to start an equities portfolio to complement his cash savings," says Mr McDermott. He recommends choosing UK equity funds with good track records such as M&G Recovery and Invesco High Income, along with global exposure. For this, he favours Rathbone Global Opportunities and Allianz RCM BRIC Stars.

Property

It is wise to pay off as much of the tracker mortgage as possible – particularly as rates are only going to rise. "This could be done with bonuses or dividends from his company," says Mr McDermott.

Brad's desire to purchase a property for his mother is "admirable", says Ms Kennedy, but he should tread carefully before rushing ahead and buying the property in her name.

If he does buy a property for her in the future, Ms Kennedy warns: "As Brad has nothing or little in the way of pension provision, one way he could boost his income in retirement would be to purchase the property in his name as a buy to let. Then he could allow his mother to live there rent free for life, though he would need tax advice about the best course of action."

However, when adequate reserves are in place, Brad will face a dilemma, warn the advisers, as he's keen to repay the mortgage but also wants to purchase a property for his mother. "One option is to shorten the term of the mortgage rather repay it to reduce the debt at a faster pace," says Ms Kennedy.

Mr Cox warns: "He should be nervous of taking out further borrowing at this stage as this could ruin his seven-year plan of repaying the mortgage if he is determined to do so."

Retirement

There are obvious benefits for a higher-rate taxpayer investing in a pension with the tax breaks on offer. "A pension is the most efficient way of saving for retirement for Brad, and he has the extra opportunity of funding his retirement through his company as part of his remuneration strategy," says Mr Cox.

He explains: "Employer contributions to a pension are normally allowable as a business expense, saving both corporation tax and employer and employee National Insurance contributions."

However he decides to save for retirement, a plan should be put in place soon.

Do you need a financial makeover?

Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF

j.knight@independent.co.uk

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