Wealth check: 'I want to retire at 55 on £50,000 a year'
Lawrence Ireton, 24, makes a good living from his lettings firm, but has big plans for expansion and an easy retirement. He'll need to juggle, says Kate Hughes
Sunday 09 May 2010
At just 24, Lawrence Ireton has his own property lettings business and big plans to expand.
Like many small-business owners, his personal and business finances are closely linked, and Lawrence hopes to increase his own existing property portfolio to let via the business. But he may have to do some clever asset juggling to be able to stump up the cash in a tough mortgage market.
"I'd like to know how I can leverage my assets more to be able to invest in other properties," Lawrence says. "I really need to know how my finances will be affected with the current deals on the market. But I'm also keen to find out how I can save for the future with my current income and expenditure levels." And with hopes to retire at 55 on £50,000 a year, he'll need to start soon.
The good news for Lawrence is that he has already done well, has many years to achieve more and has enough cash to be a little flexible. "Lawrence has made a significant amount of money through his property investments and has accumulated some additional savings," says Kevin Anderson, an independent financial adviser (IFA) for Budge and Company. "Now may be an appropriate time to diversify his savings into stocks and shares and pensions, and to allow his income stream to grow to facilitate additional borrowing for property investment."
Lawrence will have to be organised and make his money work hard to begin to achieve his goals – starting with his current accounts.
"Lawrence has a Barclays overdraft costing him 1.49 per cent every month," notes Robert Forbes, an IFA for Plutus Wealth Management. "He should try to clear this with his savings as the interest is taxed at 20 per cent.
"As Lawrence is running a business where void periods and emergency repairs are possible, he is right to have cash reserves of nearly £20,000. Unfortunately, the returns on his savings will be poor, but that's the price of having instantly accessible cash."
Lawrence has a collection of property lets in the UK, Italy and Spain, with small interest-only mortgages outstanding on the UK homes. But Dennis Hall of YellowTail Financial Planning suggests this loan arrangement should not be a long-term solution.
"An interest-only mortgage can seem attractive from a tax perspective, as all the interest can be offset against rental income, but at some point the capital will need to be repaid," he says. "Unless Lawrence has an alternative means of repaying the capital he will need to sell one or more properties to do this, which would seem to defeat the object of using these properties as part of his retirement planning."
If a repayment loan didn't appeal, he could build up an investment fund to cover the cost of the whole loan. But he'll need to save hard. "With 21 years to go, he will need to save about £524 per month, assuming a net return of 6 per cent from investments to achieve the £260,000 mortgage liability," Mr Hall says. "At this level, his ISA allowances would be sufficient to grow this fund in a tax-efficient way."
But Lawrence wants to raise capital from his existing property in order to buy more property, which could be difficult on his £25,000 income. "While buy-to-let deals are available, they are nowhere near as attractive as they used to be and the lending criteria is much stricter," says Mr Anderson. "Some lenders require a minimum earned income over any rental income, others take into account the rental income. Existing properties may be remortgaged to raise the 30 per cent deposit required, but his current income could make saving enough very difficult."
"It's important that Lawrence gets advice about tax," Mr Forbes says. "He says all his income from his lettings firm is taxed as earned income and he could take a proportion of this in the form of dividends which offer a saving on his National Insurance contributions. If he decides to make pension contributions then he should do so as an employee contribution. It will be viewed as a business expense and could reduce his corporation tax liability."
Lawrence does not have any pension provision as yet, but wants to retire at 55 with a pension of £50,000 a year. "This might be a little ambitious," Mr Anderson suggests. "He would need to build up a fund of around £850,000 in today's money. This will mean Lawrence making substantial pension contributions almost immediately, or perhaps scaling back his expectations."
But Mr Hall goes one step further. "If Lawrence wants to draw, say, 4 per cent of his pension pot in retirement income every year, he'll need assets of around £1.25m. In 21 years, this figure will be closer to £2.33m assuming annual inflation of 3 per cent. That should be Lawrence's target."
Lawrence's properties will go some way towards achieving this and if house prices increased by 6 per cent a year, two of his flats alone – with a current combined value of £495,000 – might grow to around £1.68m by the time he comes to retire at 55. "But there will no doubt be some capital expenditure along the way, as well as the need to service the mortgage costs and repay the capital," Mr Hall adds.
However, Mr Forbes disagrees that property is the answer to Lawrence's pension aims. "There is nothing better for long-term savings than a pension plan. However, I would suggest that in the short term Lawrence use his equities ISA allowance of £10,200 this year," he says. "This way he'll be able to invest in the market in the same way as he would do in the pension and then in later years when he feels more settled he could put the money into a pension plan and receive tax relief at his highest rate."
Wills & Insurance
Not only has Lawrence invested in life insurance but, unusually, he already has a valid will. Because he has built up significant assets, Lawrence should ensure that he keeps both up to date and should consider writing the insurance policy into trust for his heirs. Doing so will mean the payout is no longer part of his estate and will go straight to his beneficiaries without being subject to inheritance tax.
"He should also consider a critical-illness policy that will provide a lump sum if he contracts a critical illness – a powerful protection policy," says Mr Forbes. "It's good to see that Lawrence has written a will, and he should also consider a Lasting Power of Attorney. This is a living will and gives someone the ability to make financial decisions on his behalf if he were incapacitated."
Do you need a financial makeover?
Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF email@example.com
Fuel poverty could kill 100,000 vulnerable people over the next 15 years, charity warns
Phoenix Life: Chance of a refund for overcharged policyholders has risen
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Simon Read: That's right, BT, they'd rather pay for a free service
Bank-beating exchange rates on your international payments
- 1 Forget 'The Dress': Here are five of the biggest news stories you might have missed
- 2 The black and blue dress: Makers considering a white and gold version
- 3 Prince Harry leaving the armed forced to pursue conservation projects in Africa
- 4 PornHub turns masturbation into energy in bid to save the planet
- 5 The remarkable archaeological underwater discovery that could open up a new chapter in the study of European and British prehistory
New theory could prove how life began and disprove God
Half of Ukip voters say they are prejudiced against people of other races
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
This is what it's like to be dead, according to a guy who died for a bit
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Aqsa Mahmood branded a 'disgrace' by her parents after claims she recruited three UK girls flying to Middle East
iJobs Money & Business
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...
Day In a Page
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 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
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