Wealth Check: 'I want to buy a new flat and pay for a decent pension'
Saturday 16 April 2005
Paul Walker, 31, technology consultant
Salary: £79,000 including benefits and bonus
Loan: £16,000 at 5.9 per cent
Property: Wants to buy a flat
Savings and investments: £6,000 in cash ISAs, £9,000 in stocks and shares ISAs, £3,000 in premium bonds, £18,000 in other cash savings (an internet account earning 5.5 per cent), and £7,000 in an M&G index tracker fund.
Pension: Contributions of about £350 each month.
Monthly outgoings: Paul needs cash for socialising at weekends and eating out. He takes two holidays a year and some city breaks but has no other big spends.
Paul Walker would like to buy a flat in central London in the next year. He has some reservations about the housing market being overvalued and would also like clarification about rules surrounding transferring property into a fund.
He seeks a flat in the region of about £300,000 - he has £30,000 towards a deposit, which he nearly used to buy an apartment in Rio de Janeiro last year, but he didn't see one that he liked.
Paul makes pension contributions of 4 per cent of salary, which is matched by the company. He has been contributing for 18 months. He adds an additional £100 a month and wonders if this is sufficient. Additionally, he has two years of pension contributions in a fund in Australia, where he has permanent residency, but doesn't think he can repatriate this fund to the UK.
We put Paul's case to Paul Willans at Mazars Financial Services, Paul Ilott at Bates Investment Services, and Andrew Merricks at Skerritt Consultants.
If Paul wants to keep the Rio dream alive, Andrew Merricks says he could consider a 100 per cent mortgage for the London flat, such as the two-year, fixed-rate deal costing 6.19 per cent with Northern Rock. The loan would cost him £1,967 a month. The rates for 100 per cent loans are larger than for smaller loans. With his £30,000 as a deposit, the monthly payments on a two-year fixed rate of 4.99 per cent with Cheltenham & Gloucester would be £1,559 each month.
Paul Willans warns that by tying up all his assets in his property, Paul would be heavily exposed to rising interest rates. Although a fall in house prices could wipe out his equity stake, he may decide this is a long-term purchase of a home, rather than an investment. In this case, he should focus on his monthly commitment and choose a mortgage limiting his interest costs in the short term.
Paul Ilott says investing in residential property, using your pension fund, will become possible from 6 April next year, when new pension reforms take effect. But he warns pension savers to think carefully before investing in residential property it is unlikely to produce the sort of returns seen over the past five years.
If Paul lives in the flat, he will have to pay marketable rent into his pension fund, as he will be judged to be directly benefiting from the use of the investment in his pension. It is treated as a "benefit in kind" under taxation rules: in short, he will have to pay more in income tax. The benefit-in-kind rules will not apply if he rents to a third party.
Paul's pension planning appears to be on track, says Merricks. Although, it is always easy to make an argument for putting more in, at Paul's age, Merricks would support contributing to an ISA with excess funds, rather than putting them into the tax-efficient, yet inaccessible, pension fund. He can add lump sums to the pension at later dates.
Willans says Paul is right to consider additional investment in his retirement planning, but he may need to scale this back if he buys a property. As a single person, he needs to insure his largest asset his future income against long-term sickness or disability.
Willans says that assuming Paul is going to keep some of his ISA funds after the property purchase, he should think about how to achieve good diversification. He may wish to consider the suitability of his M&G Tracker Fund, where the sole aim is to track the fortunes of the FTSE All Share Index, in favour of a managed fund.
Ilott suggests Paul considers repaying his £16,000 loan, as, although 5.9 per cent is low, repayments still account for £944 of his after-tax income. As a higher-rate taxpayer, he would need his savings accounts to generate before-tax interest equivalent to 9.83 per cent a year in order to match the after-tax return he would get by repaying his loan.
Paul's investments are fairly tax-efficient and cautiously managed, says Ilott. As a higher-rate taxpayer, Paul is obviously keen to prevent personal income tax and potential capital gains tax liabilities, but Ilott would urge him to consider having at least a small exposure to more aggressive actively managed stock market funds.
Paul's M&G Index Tracker is the type of fund that performed well during much of the 1980s and 1990s, but the investment environment is now quite different, and more active funds have the potential to perform best. A fund like this would also compliment Paul's tracker fund because the patterns of returns are less likely to coincide with one another.
For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS, or e-mail email@example.com.
- 1 Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
- 2 Google April Fools': company unveils backwards search engine and huggable digital assistant
- 3 I might be an MP, but that doesn't stop me fighting sexism with my breasts
- 4 April Fools' Day 2015: The best hoax news stories from around the internet
- 5 Gamers confess the worst things they've done in The Sims
Street preacher quoting from the Bible fined for calling homosexuality an 'abomination'
Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
Revealed: Putin's army of pro-Kremlin bloggers
Katie Hopkins reported to the police for race hatred by Labour MP Simon Danczuk after tweet about Pakistani men
iJobs Money & Business
£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...
£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...
£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...
Day In a Page
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000