The patient
Richard Weiss, 26, from Taunton, Somerset, has been funding his lifestyle from a substantial insurance payout after a serious motorbike accident in 2002. But he is aware that the lump sum won't last for ever. Now he's keen to make his money, awarded in 2008, start working for him, and has recently bought a property to renovate and partly rent out.
"I would like to own as much buy-to-let property as possible," Richard says, "concentrating on the single young professionals market and starter homes for young families. I have just bought my first house, which I hope will be ready to start renting out in three or four months. I'd like to buy another property within the next couple of years while prices are relatively low."
For work, he has ambitions to join the police but would like to get his buy-to-let project up and running first.
Richard is determined to continue building his property portfolio, but with no pension savings and few investments other than cash, he is aware that he should be starting to think more broadly about his financial situation if he hopes for a comfortable future. He has high ambitions for his retirement. He wants to retire on an income equivalent to £25,000 a year. He is backing property as the key investment vehicle to get him there. "I'd like to retire when I'm between 55 and 60, and the property that I hope to accumulate and own outright by that stage should also boost the pension fund," he says.
The cure
Richard's situation is unusual. Unlike many people his age, he owns his first property outright and still has a substantial lump sum in the bank. He is arguably in a strong financial position. But with no regular income and no retirement savings, our panel of independent financial advisers is keen for Richard to diversify his assets from bricks and mortar to help to protect his savings lump sum from the effects of market volatility.
Savings/investment
Richard needs "liquid assets" in his current situation – money he can get at quickly and without significant penalty, but which still offers a competitive level of interest in case he doesn't need it. He has about £90,000 saved in a Nationwide e-Savings Plus account; another £8,000 in a Smile.co.uk ISA; £1,000 invested with the Government backed NS&I Investment Account; and a further £1,000 in current accounts.
"Richard is spending £11,300 annually, although this will drop to £7,700 when he is able to move into his refurbished home," says David Brunning of Brunning Newman Houghton. However, Mr Brunning adds, Richard is not getting the level of returns he should for his savings, and when you have about £100,000 to invest even one percentage point can make a significant difference. For example, NatWest is currently paying 3.45 per cent on its variable rate instant access ISA – almost seven times more than the 0.5 per cent offered by Smile.
Meanwhile, Richard's Nationwide e-Savings Plus account is paying 2 per cent before tax, but if he makes four or more withdrawals in a year this plummets to only 0.1 per cent. Stroud & Swindon Building Society, closer to Richard's part of the world, is paying 2.25 per cent on some accounts with no limits on withdrawals. If Richard is regularly dipping into his Nationwide account, switching to Stroud and Swindon could earn him £1,935 more money over a year, Mr Brunning calculates.
But inflation is expected to increase. To combat the erosive effects of inflation, Richard could consider looking at his wider investment options.
"Richard seems keen to concentrate on property but many professional property developers are still staying out of the market," says Mr Hall. "Over the next five years or so, I feel that shares will have a greater potential to bounce back, along with commercial property. If Richard did want to speculate in property, he could consider commercial property investment trusts."
The advisers are also keen for Richard to consider options like equities because investment 'units' are relatively cheap to buy right now because of the depressed stock market.
Property
Richard has just bought his first home, a three-bedroom property in Taunton, for £118,000, which he hopes will be worth between £160,000 and £170,000 once he has completed the renovation. He plans to rent two bedrooms and take the third himself before moving on to his next investment property. But the advisers aren't convinced.
Property is an attractive asset and can offer a good income. But a decline in the property market could be disastrous. Sensible investors should spread their money across a range of asset types to help to dilute the effect of a potential downturn.
"I would caution against going too overboard into property," warns Dennis Hall of Yellowtail Financial Planning. "I think property has the potential to fall further, and interest rates to rise much higher.
"Mortgage lending criteria are strict right now, and Richard's next purchase will mean borrowing. A lender will want to see the mortgage costs covered with a large margin by the rental income, but that margin will shrink when interest rates start to climb again."
"Locking into a fixed rate would help to alleviate this but obtaining buy-to-let mortgages these days is not as simple as it used to be," Mr Hall adds. "It may be possible to obtain a mortgage on the first property in order to buy a second, but Richard will find it easier to obtain a mortgage once he starts employment."
Having said that, Richard's first foray into renting out is unlikely to be traumatic as he owns the property outright, and he will be on hand in case of problems as he plans to live there. Depending on how much he expects to receive he may also find that some of the rental income is tax free under the Government's rent-a-room allowance up to a total of £4,250 a year.
Pension
When it comes to retirement planning, diversification is once again important, notes Daniel Clayden of Clayden Associates. "Taking into account Richard's aim of building a property portfolio, he may wish to consider investing in a stakeholder pension," he says. "While he currently has no net relevant earnings, he can contribute a maximum of £2,880 a year net of basic rate tax."
If Richard gets a job, particularly as a police officer as he hopes, he could benefit from an excellent pension, and can view his investment property income as a useful addition. If that ambition falls through, then he will have to resort to saving from his income towards retirement. Although Richard has high hopes for his retirement income, he may need to delay creating a pension until his more immediate future is clear.
Do you need a financial makeover?
Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk
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