Two years ago, Luke Howells, 39, changed career to become a secondary school teacher. At the time, he was also involved in legal proceedings against the freeholder of the leasehold flat he owns in south-west London. The cost of retraining as a teacher, plus the expensive legal complications arising out of his property issues – he needs to find an extra £15,000–£20,000 to complete the legal process – is causing him concern.
"I want to put my finances on a sounder footing," Luke says. "Due to the complications in the freehold purchase I am going to have significant unsecured debts. I also want to return to the regular savings pattern that I had until three years ago, including significant contributions to a pension scheme."
Luke has no dependants and starts a permanent teaching position in September. He has previously contributed 17 per cent of his income to a pension scheme.
Case notes
Salary: Earns roughly £2,500 a month gross.
Monthly outgoings: About £900 in taxes, £775 on bills, food and essentials, £400 on loan repayments, £150 on insurance and £150 on savings.
Savings: £500 in a building society deposit account, £300 in a Cash ISA, £5,000 in an investment bond.
Debt: £8,500 in student loans, £3,200 credit card debt, £9,000 unsecured loan at 6.9 per cent (four-year term from 2006), Woolwich Lifetime tracker mortgage at 0.39 per cent above bank base rate (25-year term from 1997).
Advice this week is given by independent financial advisers Tom McPhail of Hargreaves Lansdown, Christopher Wicks of N-Trust, and Dennis Hall of Yellowtail Financial Planning...
Debt and spending
Luke's £3,200 credit card debt is on a 0 per cent rate until August, but then the cost will soar. Dennis Hall says: "His credit card debt is suddenly going to get very expensive compared to his other debts. This should be the priority to clear as interest will most likely be charged at around 17 per cent from August." Tom McPhail agrees and feels that Luke should use his teacher's 'Golden Hello' – a £5,000 payout he will be eligible for in September when he starts his new job – to clear his credit card debt.
Christopher Wicks says Luke could also benefit from reviewing his expenses to see where savings can be made: "Luke should check that he is getting the best rates for household and other insurances as well as utilities. In terms of insurance, he probably doesn't need any life cover at the moment since he has no dependants. However, incapacity cover may be worthwhile."
Hall agrees: "He should check the terms and conditions of his income protection and critical illness policies to see whether they provide suitable benefits. Is it possible that he could reduce cover in order to free up additional monthly disposable income to help him become debt-free sooner, and to build up pension benefits?"
Extra financing
Luke currently has a surplus every month of around £125, but as Hall notes "the extra borrowing of up to £20,000 could cost more than this". Both Hall and Wicks warn that, with Luke's current monthly expenditure – particularly with the £400 outgoing on the unsecured loan – there is a risk that it may be difficult to obtain further financing on competitive terms.
They feel that a potential starting point, however, could be to borrow further on his mortgage, as, at his current interest rates and monthly mortgage payments, Luke probably has enough equity in his property (currently worth £160,000) to do this. "Whether he will manage to obtain the same deal is something he needs to take up with his mortgage company. The additional danger, however, is that when interest rates increase, so will his monthly payments," Hall cautions.
Savings and pensions
Neither Hall nor McPhail are enthusiastic about Luke's investment bond. Hall believes that Luke should use it to clear his credit card debt, while McPhail says: "I would prefer to see that money invested in an equity ISA. Depending on the term Luke is holding it for, I would suggest a UK Equity Income fund such as Artemis or Invesco Perpetual."
"Luke isn't making fullest use of ISA allowances," Hall observes. "The limit for cash ISA savings is £300 per month, yet he's saving £50 per month into a building society account which doesn't have the same tax advantages. Longer term, investing monthly into a stocks and shares ISA would be a good idea. Investments made now will work in his favour when markets make their recovery in time."
The fact that Luke wants to get his pension contributions back up is very positive, says McPhail: "Luke has already been funding his pension at a good rate. It also makes sense for him to become a member of the Teachers' Pension Scheme in September."
Wicks advises: "Luke may be able to top up his Teachers' Scheme by making some additional contributions – there's a range of options for this. He can obtain a forecast from www.teacherspensions.co.uk/scripts/pencalc2.asp. In addition, he could also contribute to a private pension."
McPhail adds: "Pressure for public sector pensions' reform means that the Teachers' Scheme is unlikely to become more generous, so he may want to top up his pension provision."
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