Wealth check: My credit cards are paid off – what do I do now?

Sophie Hammond, 32, wants retirement income of £32,000, savings, a property portfolio – and to clear a debt to her parents. It’s a tall order.

The patient

When Sophie Hammond, 32, from Derby, finally cleared her substantial credit-card bills last month, she realised she didn't know what to do next.

The senior creative manager for a graphic design company earns £54,000 a year, has some savings and has already been paying into a private pension for more than a decade.

"My parents helped me buy my first property – a buy-to-let flat in Bath – around five years ago," she says. "They lent me the deposit by remortgaging their own home.

"I feel like I'm finally in a position to be able to start paying them back, and make the most of my money now that I've cleared my crippling credit-card bills," she adds. "I just don't know where to start."

Now that Sophie's only personal debt is her parents' loan and her mortgage, which is usually covered by her tenants' rent, she is keen to start building up her property portfolio. But she isn't convinced that she can afford another property while paying enough into her pension and still having sufficient savings in case of a rainy day.

The cure

Sophie is more financially secure than she has ever been. She has ambitious goals for her money but still wants to be sure she's protected in the short term. "Sophie's two main goals are to build her wealth through a property portfolio and ensure she is able to retire on a comfortable income of £32,000 a year," says Danny Cox, an independent financial adviser for Hargreaves Lansdown.

Protection & savings

Sophie is keen to ensure that she will be safe if she lost her regular income through redundancy, an accident or illness, so she should consider an income protection policy, which will pay out a proportion of the policyholders' income if they are unable to work for a long period. This type of policy replaces income rather than paying off a specific debt and could pay out until retirement if necessary.

"Income protection insurance is absolutely essential for Sophie as her plans and aspirations will fall apart if she suffers long-term ill health and is unable to work for any significant length of time," says Robin Keyte, an independent financial adviser for Towers of Taunton.

Sophie currently has around £10,000 in an ISA and £1,000 in an instant access savings account, which she uses as her emergency money. In addition to an income protection policy, Sophie should aim to have between three and six times her monthly income readily available to tide her over until the policy kicks in or to cover the cost of other unexpected bills.

"Because she is a higher-rate tax payer, I suggest Sophie accumulates this fund using cash ISAs to ensure she minimises the extent to which interest she earns is taxed at 40 per cent," Mr Keyte says. "Her current cash ISA allowance is £3,600 rising to £5,100 after 5 April 2010. Within the next 14 months – covering three tax years – she will be able to contribute up to £13,800 into cash ISAs."

Investments & property

With one buy-to-let property already under her belt, Sophie is keen to expand her portfolio. But the overwhelming majority of her finances are tied up in the property market, so it's important that she doesn't keep all her investment eggs in one basket, warns Darius McDermott, an independent financial adviser for Chelsea Financial Services.

"By increasing her exposure to the property market through the purchase of another house Sophie will be allocating even more to a single type of asset," he warns. "Broad asset allocation and holding a diverse range of assets is the golden rule to constructing a well-balanced portfolio that will offer you robust investment returns. It means that if one type of investment drops in value you still have others to fall back on.

"The economic recovery is by no means certain," he adds, "and property might endure another slump. Or an economic recovery might spark a rapid hike in interest rates."

Mr McDermott also says that to help expand her asset class mix, Sophie should look for low-to-medium risk equity and bond funds. Through carefully selected investment in a stocks-and-shares ISA, she can expect capital growth that will allow her to provide for any forthcoming projects, deposits, and building work, as well as potentially supplementing her retirement income.

Funds such as the M&G Recovery Fund, Henderson Strategic Bond Fund and the Artemis Income Fund invest in solid-core holdings that suit Sophie's aims to increase her money in the long term.

However, if Sophie is determined to focus on building up her property portfolio, she will need to save a decent deposit and commit to greater borrowing. This may lead her to use surplus income to save for a deposit rather than reduce her current debt.

"Borrowing to invest will accelerate, or improve, returns when the underlying asset does well and rises in value," says Mr Cox. "However, when markets fall, the reverse is true. If Sophie is concerned about owning more than one property, and the possibility of two mortgages and no tenants, she should aim to limit her borrowing as far as possible."

Meanwhile, any profit Sophie makes on a rental property will be subject to Capital Gains Tax at 18 per cent, which is not payable if it is her own home. With personal mortgages cheaper and easier to obtain than buy-to-let loans, the advisers suggest Sophie's next property purchase should probably be her own home.


Sophie has been saving 6 per cent of her salary since she was 23 which her company matches, giving her a current pension fund of around £50,000. The good news is that, assuming she carries on contributing 6 per cent of her gradually increasing salary, and her investment grows by 6 per cent a year, she will achieve her ambition of retiring on £32,000 in today's terms. In fact, Sophie may even be able to retire a few years early, says Mr Keyte.

Sophie is enjoying higher-rate tax relief on the contribution she is paying, which means the £270 a month she pays costs her just £162. But because her company pension scheme will only assume 20 per cent income tax relief, Sophie should make sure she claims the additional 20 per cent in higher-rate tax relief via self-assessment.

"Higher-rate tax relief is already under attack and could be abolished," warns Mr Cox. "Therefore Sophie should consider increasing her contributions to make the most of this while she can."

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Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk