Wealth Check: 'I want to clear my web of debt and save more'
John Hilton, 30, Chester
Saturday 03 December 2005
Personal: John is an internet developer and earns £25,000.
Property: Shares a rented house in Chester.
Debt: £1,728 owed on credit cards (paying off £120 a month); a £5,800 car loan (paying off £160 a month).
Savings: Pays £100 a month into a cash ISA.
Pensions: Is not currently saving for retirement.
Monthly expenditure: Rent of £600 a month, plus £600 living expenses.
John Hilton, an internet specialist, lives in Hoole, Chester where he rents a house with a friend. John is trying to pay off his debts of £7,500, but is concerned they're not disappearing quickly enough.
At 30, John also wants to start saving for his retirement and, in the shorter-term, would like to step on to the property ladder within the next couple of years. He has £500 in a pension from his last job, but is not now contributing to a scheme. For the past two years, John has been paying £100 a month into Lloyds TSB cash ISA, which pays 5 per cent annual interest.
We asked three independent financial advisers for help: Ben Yearsley of Hargreaves Lansdown, Jonathan Fry of Jonathan Fry and Company, and Kevin Morgan of Consilium Financial Planning.
Ben Yearsley wonders why John is saving £100 into an ISA every month that pays him 5 per cent interest while also repaying credit card debts charged at 8 and 20 per cent. He could clear both debts within a year if he stopped paying into his ISA. The car loan is less worrying because it was used for a purpose and is less expensive.
John faces a challenge common for people in their twenties and thirties, says Jonathan Fry. He wants to buy a house, provide for his pension, repay his debts and leave money over to enjoy life. Fry also thinks John should cash in the ISA and pay off as much as the credit card debt as possible. He should then use the spare £100 a month to pay off the balance more speedily.
Kevin Morgan suggests John transfers his debts to a credit card offering a 0 per cent introductory offer, so that interest charges stop racking up. Only when he is debt-free should he begin to look at property.
John needs to balance the demands of saving into a pension with his desire to buy a property, advises Yearsley. Pension savers should try to contribute a percentage of their salary that is equivalent to half their age - 15 per cent in John's case. Starting early is the best way to save for old age, and Yearsley suggests that the pension should be more of a priority than a property purchase.
If John contributes 15 per cent of his salary (some of this may be available from his employer) from now until his retirement, he would build up a pot of more than £600,000, which would give him an annual income of approximately £13,000 in today's money. However, by leaving it another five years, his pension pot would only be £440,000 and his annual income would be £10,500 in today's money.
Yearsley thinks that if John does not have access to a company pension scheme, he should open a self-invested personal pension (Sipp). The choice of investment funds on offer with a Sipp is much better than with traditional stakeholder or personal plans.
Sipps have become accessible to all savers, and John could start by contributing £50 a month. Good initial investment choices would include equity income funds such as Invesco Perpetual Income, Artemis Income and Jupiter Income, Yearsley adds. As he builds up savings, he can become more adventurous.
Fry wonders whether John could devote 10 per cent of his salary to a personal pension plan and ask his employer if it would pay 5 per cent. Paying £200 a month into a Sipp - just under 10 per cent of John's pay - would require him to give up £156 of disposable income, because he would get tax relief from the Government at the 22 per cent basic rate of tax.
If he can get rid of his credit card debts - and preferably cut up the plastic - John might be able to start saving towards a house deposit, says Fry. He needs a minimum of £5,000, enough to afford a 5 per cent deposit on a £100,000 house. A standing order of £400 a month into a suitable account over 12 months would produce £4,800.
Morgan reckons it would cost £130,000 for John to purchase a "two-up-two-down" in his part of Chester. If John could muster a deposit of 10 per cent, he would qualify for a cheaper mortgage. Broadly, a mortgage of £120,000 on an interest-only basis would cost him around £500 a month - less than he now pays in rent.
He could mitigate the cost of the mortgage further by renting out a room - tax breaks are available under the rent-a-room scheme.
Independent Partners: See how much you could save by switching credit cards. Compare now
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