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; request a free guide on NISAs from Hargreaves Lansdown
Pension mortgages: 'The advice I was given was wrong and now I face losing my home'
You'll need £220,000 for a minimum wage in your retirement
Questions of Cash: I checked in with Air France in time and still missed the plane
Money Insider: Supermarkets: the real challenger banks
Minister's pension promise to firefighters challenged
- 1 Planes go hybrid-electric in important step to greener flight
- 2 Antonio Martin shooting: Mayor says there should be 'no comparison' to Ferguson
- 3 Antonio Martin shooting: Police and protesters clash over teenager's death just five miles from Ferguson, Missouri
- 4 Northern Lights above Britain: Stunning Aurora Borealis illuminates Northumberland sky on Christmas Eve
- 5 British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
iJobs Money & Business
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...
£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
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
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
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
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens