Mike Ord, 33, works in the construction industry and is self-employed. He lives with his girlfriend in Leeds, has a 10-year-old son, and is planning big things for the next few years. He wants to start his own business and buy a home, but is concerned that he has yet to start saving for a pension, and has no savings.
We asked three advisers: Anna Sofat from AJS Wealth Management; Matthew Woodbridge from Chelsea Financial Services; and Mark Wapshott from St Edmundsbury Financial Services, to put Mike on the right track to achieving his goals.
Case notes: Mike Ord, 33, self-employed, Leeds
Salary: 28,860 per annum
Monthly spending: 1,450
Debts: estimated at around 12,000
Pension pot: 0
Anna Sofat estimates that Mike should have around 770 extra money after his monthly expenses. She suggests that he should spend 42 per month on income protection, 78 on pension contributions and save the remaining 650 for a rainy day, longer term.
"Being self-employed, Mike should seriously consider some income protection," she says.
"At his age, it would only cost around 42 a month to insure for an annual benefit of 15,964. The benefit would kick in after six months and would be payable to age 60 if required and would be payable if he was unable to do his own job."
Mark Wapshott agrees, but urges him to consider contingency plans as part of his insurance portfolio: "Protection for Mike's child should be a priority, as should his own income cover. This must be written in trust for Mike's child, therefore a will is crucial."
All three believe that Mike will struggle to get close to his target retirement income if he does not start saving for a pension immediately.
"Mike wants to save for his retirement and that's really sensible," Sofat says. "He is looking at a monthly income of 1,000 at age 65 to live on. He can achieve his goal if he was to commence saving 100 a month (net cost 78) and increase his contribution by RPI each year.
"If he was to due to this, he could accumulate a pension fund of 142,000 at age 65 (assuming a growth of 7 per cent a year) which could provide him with an annual income of 7,830 plus a tax free lump sum of 25,000.
"In addition, he can expect a state pension of 4,540 pa from age 67. He will thus have two years when his income will fall short of his requirements, but he will have the 25,000 lump sum which he can utilise to fund this shortfall."
But Woodbridge thinks that Mike should have started saving much earlier if he expected to realise a 1,000 monthly income.
"Mike, at 33, is already a late-starter in pension terms and needs a reality check in terms of what he can expect in terms of net retirement income.
"Mike is prepared to take on a greater degree of risk to achieve his financial goals. He will have to forego a cautious approach if he is to receive the type of retirement income he requires. If he does lift his risk threshold, we would recommend a flexible pension such as the Standard Life SIPP.
"As he has a 30-year time horizon, he could choose a wide range of funds including specialist funds such as Alliance BRIC Stars, JP Morgan Natural Resources, and a good general fund such as Neptune Balanced."
"While it is encouraging that Mike is looking to begin saving, it does not make financial sense given his current debt situation," says Woodbridge.
"While the rate on his loan is good in the current environment, it is likely to be above even the best saving rates currently available on savings. If Mike did decide to save now it would have the net effect of costing him more to keep up his savings than pay back his loan."
Wapshott agrees: "Mike needs to repay the consolidation loan as soon as possible. That must take priority before, for example, planning to purchase property with a mortgage. Some lenders will take into account the current loan and reduce the amount available to borrow."
But Sofat offers an alternative. "If Mike was to be disciplined, he could save 650 every month and would have saved circa 6,500 by end of year, as well as having reduced his debt by around 6,000," she says.
"He should utilise his cash ISA allowance each year. He could save a further 250 a month in a high interest saving account and use the remaining 150 to overpay on his loan. An overpayment of 150 a month could reduce his term by about 24 months."
Wapshott adds that Mike could have missed a tax trick that could add to his savings.
He said: "If Mike is on the sub-contractors tax certificate scheme, he should employ the services of an accountant to claim any extra costs associated with his job and possibly even re-claim up to six years tax already paid," he says.
Mortgage and Business
All three advisers agree that buying a new home and setting up a business are risky, particularly with no emergency fund buffer, and urge Mike to consider whether it is wise to take on the payment of a mortgage given the current climate, if it is not entirely necessary.
"Mike must consider that the current slump is affecting house prices, and that interest rates are relatively high, before he makes a decision as to whether his money could be made to work harder using an alternative investment option," Woodbridge adds.
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