Andrew Marshall , 24, hopes to be a millionaire by the time he reaches 30. The business development manager works at an office design company and hopes to be earning a six-figure salary by the end of the year. He has been with the firm since leaving the University of Leeds in 2007 and, although a large percentage of his salary is paid in bonuses, he foresees his income increasing significantly in the coming years.
In 2008 Andrew bought a flat in Paris with a €250,000 mortgage. He plans to sell the flat this year and use the equity he releases to invest in a savings scheme. "My short-term goal is to focus on significantly reducing my outgoings to start a regular savings plan with my investments providing a small income which I can use to reinvest to build up a lump sum," says Andrew, who currently shares a flat in West Hampstead. "My medium-term goal is to save enough to have a deposit to buy a flat in London. Meanwhile long-term I hope to have saved enough to be able to retire comfortably by the age of 55."
Annual income: £70k-£100k (depending on bonuses)
Tax and national insurance: £1,000 a month
Rent and bills: £1,000 a month
Mortgage: £1,000 a month
Living expenses: £1,000 a month
Holidays: £2,000 a year
Offering advice this week are Mel Kenny of Radcliffe & Newlands, Robin Keyte of Towers of Taunton and Darius McDermott of Chelsea Financial Services...
"Financial planning is made a easier when one can depend on a steady income," says McDermott. "Unfortunately while Andrew appears to be taking home a healthy salary cheque it is variable and cannot be taken as a fixed income each month. He must build up his cash savings so he can smooth out any loss of earnings in the long run as well as providing for any unforeseen emergencies – I recommend three times his monthly salary."
"As a higher-rate taxpayer, Andrew should make full use of his ISA allowances of up to £5,100 in cash and £5,100 in equities or up to £10,200 in equities," suggests Kenny. "If Andrew wishes to invest in a stocks and shares ISA, he should take a five-year view."
McDermott recommends core UK funds with moderate risk profiles and strong track records such as M&G Recovery and Invesco Perpetual Income. "Andrew could could also look to expose a small allocation of 5-10 per cent of his portfolio to emerging markets and commodities, but it must be borne in mind that these are higher-risk investments. I recommend monthly investing to even out volatility."
Keyte favours investing in shares through investment funds. "A favourite of mine is Alliance Trust, which offers a fund platform where clients rather than IFAs can earn their own trail commission, and an investment dealing account is available offering access to UK quoted investments including investment trusts and exchange traded funds."
"Andrew's objective of becoming a millionaire by the time he reaches 30 is ambitious," says Keyte. "Assuming he sold his Paris flat, he might realise around £86,240. It may be some of that gets caught for capital gains tax (Andrew should take advice on this) but even if he invested that in shares, he would still need to make annual savings of £93,000 up to age 30, assuming 7 per cent growth.
"It's striking that presently Andrew is shelling out £24,000 a year on property in rent and mortgage interest without getting any benefit. If he sold the Paris flat and moved out of his rented flat, he might have a lump sum of around £85,000 for a deposit and £24,000 a year to put towards a repayment mortgage and the costs associated with setting up a home."
There is another option for the Paris flat, points out McDermott. "He could either realise his capital gain now by disposing of the flat or he could rent it out; both solutions will relieve him of the monthly outgoing, assuming the rent will cover the mortgage. But in selling the house he will incur capital gains tax. In deciding whether he should sell he need to calculate whether the rent will cover the cost of the mortgage. If so, as capital is paid off, the property will eventually yield him some income."
"Andrew aims to have a comfortable income when he retires but to do that considerable contributions must be made in these, his early working years, as the earlier you start the bigger the pot. Currently to receive his income goal of £50,000 per annum from age 55, Andrew would need to save £2,000 a month," says McDermott. "This should underline the extent of the sacrifice he must make now to enjoy a comfortable retirement."
His first port of call should be his employer, advises Mel Kenny. "Andrew could ask about the possibility of salary or bonus sacrifice arrangements through his employer. By sacrificing salary or bonus for an employer pension contribution instead, national insurance savings are made, with the employer potentially willing to pass on their saving into Andrew's pension. If this was the case, this would give Andrew total relief of 53.8 per cent on the sacrificed salary or bonus."
Robin Keyte calculates that Andrew's annual contribution to his pension scheme needs to start now at £15,400, assuming that contributions rise each year with earnings at a rate of 5 per cent. "However if Andrew has a good year with bonuses his earnings may exceed £100,000, in which case he should be aware of the new tax rules," points out Keyte. "High earners will have their income tax personal allowance reduced by £1 for every £2 their taxable income exceeds £100,000, giving an effective tax rate of 50 per cent on earnings between £100,000 and £112,950. If this happens Andrew can ask his employer to pay part or all of his bonus as an employer single premium into a stakeholder pension plan. It will get his retirement funding started and avoid the removal of his personal allowance."
Andrew should consider lump sum critical illness cover, says Kenny. "At his age, the cover is relatively cheap and would go some way to addressing his immediate financial needs should he fall critically ill. He should also consider income protection to protect his monthly income in the event of long-term illness or incapacity that prevents him from working."
Keyet agrees. "Should Andrew become long-term sick his income will substantially reduce. To maintain his lifestyle after such an eventuality he should take out income protection insurance. He could get cover at £32.94 a month."
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