Wealth Check: 'I need to have instant access to my savings'
Saturday 27 August 2005
Christoph pays £350 a month into an HSBC instant access savings account, but wonders whether his savings of £7,400 could be better invested. As Christoph is employed on a series of fixed-term contracts, he has been reluctant to invest in anything that does not offer instant access to the cash, in case his work dries up.
Christoph is a member of the Universities Superannuation Scheme, the further-education pension plan, and also has life insurance he took out before moving to the UK from Germany worth €200,000.
Ian Smith of Central Financial Planning, Alan Adam of Alan Steel Asset Management, and Patrick Connolly of John Scott & Partners offer a professional opinion on Christoph's circumstances.
Christoph Raatz, project worker, 30, north London
Personal: Christoph Raatz is a project worker employed by London University
Income: £27,085 a year
Monthly outgoings: £400 on rent, £120 on bills, £350 paid into savings account and £150 contributed to pension fund. Varying spending on going out and other costs.
Savings: £350 a month into an HSBC Instant Access Savings Account. The money is to be used to fund his wedding and possibly for a deposit on a property
Pension: Christoph is a member of the Universities Superannuation Scheme, paying 6.35 per cent of his salary into the plan. His employer tops this up to 14 per cent
Insurance: Life insurance in Germany worth €200,000, but no other protection policies.
Ian Smith wonders whether it is sensible to hold life insurance with an overseas company. Chris- toph should check whether this cover is valid now that he is living permanently in the UK. In any case, it may be more practical and cost-effective to take out UK life insurance. A level-term policy providing cover of £200,000 would cost him £19.15 a month from Legal & General, for example. The policy can be set up within a trust to ensure that the funds went to the right beneficiaries and avoided inheritance-tax charges.
Alternatively, from next April, it will be easier to get term assurance within a pension, as the current rules on funding limits are to be reformed. As tax breaks are available on pension-linked insurance, this may be a cheaper option.
Taking out permanent health insurance to ensure that his income is protected is a good idea, adds Alan Adam. To reduce the cost, Christoph could opt for a policy where claims can only be made 12 months after illness begins. But he must find out what his employer offers, especially as he is on a fixed-term contract.
Patrick Connolly warns that Christoph is doing himself no favours with his choice of savings account. HSBC's instant access savings account is currently paying interest of only 1.5 per cent a year, which falls to 1.2 per cent after tax. This is significantly below the rate of inflation - in real terms, he is therefore losing money.
Christoph should use his annual cash individual savings account allowance. This will allow him to invest £3,000 a year in a tax-free deposit account. HSBC's cash ISA is currently offering 4.27 per cent a year, although it's possible to improve on this by choosing another provider.
Christoph can move another £3,000 into a new cash ISA when the next tax year begins on 6 April 2006. In the meantime, the savings he can't currently protect from tax can at least be switched to a better-value account. If he's wedded to HSBC, its Regular Saver product is a good deal. It would allow him to invest up to £250 a month - the money must be moved from an HSBC current account - and earn 8 per cent during the first year.
However, Adam thinks Christoph should consider using an internet savings account to get the best deal on all his cash. Some online accounts currently pay 5 per cent before tax, and while tax will be due - at the basic rate, in Christoph's case - this will be a secure home for capital with a decent rate of return.
Smith says Christoph is a member of a good pension scheme promising a pension linked to his salary at retirement. If the scheme stays solvent, this pension is guaranteed, whatever happens on the stock market or in other investments.
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