Wealth Check: 'I want a career in aromatherapy. Can I massage my cash?'

Neera Dhingra is intending to sacrifice salary so she can work part-time while setting up her own business. She asks how she can save enough to make the transition. By Harriet Meyer
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The Independent Online

The patient

Neera Dhingra, 34, plans on cutting her working hours to concentrate on setting up an aromatherapy business.

She is head of media for Voluntary Services Overseas (VSO) on a salary of £40,400, but wants to balance working part-time in this or a similar role with pursuing a new career.

"My goal is to set up on my own, providing treatments either at home or in a complementary health centre," says Neera, who is studying for the Neal's Yard Remedies aromatherapy diploma.

Once she qualifies in December, she hopes to work a three-day week, but this would see her income slashed to around £24,300. In addition, she expects to make £13,000 from providing treatments.

To cope with the change, she is building a short-term savings buffer, with £800 in an Egg savings account earning interest at 4.75 per cent, into which she pays £250 a month.

She also has £805 in a mini cash individual savings account (ISA) with HSBC at 5.84 per cent, £2,450 in premium bonds, and £5,416 in a stocks and shares ISA. This is split across the Invesco Perpetual European and Merrill Lynch Global Equity funds.

"Despite these savings, I often turn to my parents if a big unexpected expenditure arises, like buying a new boiler when mine broke down," Neera admits. "I would prefer to have more of my own money to use in emergencies."

She made the leap on to the property ladder when prices were still booming, buying a one-bed flat in north London in 1999 for £153,000. This is now worth around £300,000.

She pays £312 a month for her 15-year £50,000 interest-only Cheltenham & Gloucester home loan at 7.25 per cent but says: "I'm keen to pay off my mortgage as soon as possible alongside starting the business."

Neera pays 8.5 per cent of her salary into a stakeholder pension scheme, with this contribution being matched by her employer. She also paid into the local authority final salary scheme for several years, and this is set to provide a pension of £1,290 a year alongside a lump sum of £3,870 at retirement.

The cure

For the first year, Neera shouldn't bank on receiving a reliable income from aromatherapy to top up her reduced salary, stress our panel of independent financial advisers (IFAs).

"Building up a cash fund, repaying her mortgage and putting the right insurance policies in place are all areas she can tackle to give herself the best chance of success," says Keith Churchouse from IFA Churchouse Financial Planning.

Savings

Neera has made a good start towards establishing an emergency fund of between three and six months' salary. But it would be more efficient to switch the monthly £250 currently going to the Egg savings account into a tax-free cash ISA.

The most that you used to be able to slot away in one of these accounts in one tax year was £3,000. Since April, this limit has been increased to £3,600, and there are some attractive rates on the market. Alliance & Leicester, for example, has an instant-access cash ISA paying 6.25 per cent.

Another way to boost savings is to cash in the premium bonds. Dennis Hall from IFA Yellowtail Financial Planning says that the returns on these are "pitiful" and the chances of scooping a big prize "extremely low". Mr Hall adds: "Neera should give her goals a fighting chance by using the money somewhere she can get a guaranteed return."

Investments

Neera has a large proportion of her ISA portfolio in Invesco Perpetual's European fund, but this is not a top performer, says Mr Hall.

Danny Cox at IFA Har-greaves Lansdown recommends Jupiter European, Artemis Global Growth and Neptune Global Equity. Mr Churchouse prefers a multi-manager fund, such as Cazenove MM Diversity, for access to "a wide range of asset classes".

Whichever investments she chooses, she must ensure they suit her attitude to risk, stress the advisers.

Property

Neera is fortunate to have a small mortgage on a property that has soared in value, putting her in a strong position despite growing evidence that substantial price falls are on the way.

"But she pays a whopping 7.25 per cent interest," says Mr Hall. "As she's a higher-rate taxpayer, this means she needs her savings to be earning over 12 per cent a year just to break even."

As soon as rates start to ease, she should look for a better deal and consider switching from interest-only to repayment to tackle the capital debt, says Mr Cox.

Retirement

If her income drops, Neera must bear in mind that her contributions to the pension plan are also likely to fall, along with her employer's payment.

In today's terms, the stake- holder fund could provide her with £5,900 a year at the age of 60, assuming 6 per cent growth after charges. Each £100 a month on top of the sum she is saving will add about £2,000 a year at retirement – giving her some idea of how much she needs to save, says Mr Cox.

Of course she will also get a state pension, with the sum depending on her national insurance contribution record. At present, the full state pension for a single person is £90.70 a week.

Protection

Neera should consider buying an income protection policy to cover her in case she falls ill or suffers an accident and is unable to work. This is particularly important given that she will be self-employed as an aromatherapist.

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