Wealth Check: 'My living costs are low but I've got huge debts'
Saturday 10 June 2006
Paul Heron, a 39-year-old solicitor from east London, has several financial dilemmas to tackle. Six years ago, he enrolled on a part-time law course at the University of Westminster and finally became fully qualified in January. The legacy from this career change is an £11,000 loan taken out to finance his studies.
This debt dwarfs the savings Paul has made - he has a small emergency fund of around £1,000, but no other investments for the future. Although he contributes £142 a month to a private pension plan, he is concerned that he will not have enough to live on later in life.
The third issue that Paul is keen to tackle is his property situation. He currently pays about £300 a month in rent for a local authority flat in Hackney, which he has the right to purchase. It's probably worth around £130,000, but should he take up the option of buying it?
We asked three independent financial advisers for their counsel: Vivienne Starkey of Equal Partners, Alec Ruthven of AM Ruthven & Associates and Kevin Morgan of Consilium Financial Planning.
Morgan says that one option, if Paul does decide to buy his flat, would be to incorporate the loan within a mortgage. This will mean borrowing more, but even a cheap personal loan is more expensive than a good-value mortgage.
Starkey and Ruthven are both keen to persuade Paul to budget more systematically. Starkey points out that after his fixed monthly outgoings, Paul has quite a decent disposable income left over.
Ruthven says that if Paul could reduce his monthly spending by £200, he could put this towards overpayments on the loan and, in time, towards his savings.
Paul should keep his £1,000 rainy day fund, suggests Morgan, who recommends that he switch the money into a single tax-free cash individual savings account (ISA). National Savings & Investments pays 5.05 per cent currently, he points out.
All the advisers think that Paul will eventually need to save more. For now, however, he will not be able to earn more on savings than he pays on his debt, so getting rid of the latter must be the priority.
Starkey warns Paul that not all lenders will offer mortgages on local authority properties - to get the best deal he should use an independent mortgage broker. Morgan says that the first step for Paul is to approach his local council to find out exactly what - if any - discount on the property he will qualify for under the "Right to Buy" scheme. Once he knows how much he would have to pay to buy the flat, he will be in a better position to talk to lenders.
If the purchase is affordable, Morgan is very positive about the idea. Paul lives in Hackney, he points out, an area set to benefit from infrastructure improvements in the run-up to the 2012 Olympics. It should also be possible to rent out a room in the property, which would help with the mortgage payments.
However, Ruthven sounds a note of caution. He thinks that Paul should give himself a year to get on top of his debt before buying - and attempt to bring down his monthly spending in preparation for the financial discipline that is required for home ownership.
Starkey is concerned that Paul is somewhat vague about the pension provision he is currently making. He must ask the Pension Service for a forecast of his likely State retirement benefits, and also get a similar projection from his current pension provider.
In addition, now is the time to check whether Paul made any pension savings before his change of career. He should not lose touch with deferred pension benefits held on his behalf by previous employers.
Armed with all this information, he can then decide whether he needs - and is able - to increase his pension saving. Ruthven says that a contribution of 5 per cent of salary a month, in addition to any employer's contribution, would be a good initial target for Paul's pension saving.
Morgan says that Paul should also check whether he is currently contracted out of the State Second Pension. If so, he should think about switching back in.
Paul has not mentioned protection products such as life and health insurance, but Starkey says that he needs to think about providing for his son. A life insurance policy, for example, would be crucial if he does not qualify for death-in-service benefits at work. Income protection insurance would pay out if Paul was unable to work due to a prolonged period of ill-health.
Paul Heron, 39, solicitor, London
Salary: about £30,000 a year.
Monthly spending: £300 a month rent and £150 financial support for his 14 year-old son. Bills and spending amount to £1,200 - wiping out his disposable income.
Savings: £1,000 spread across three savings accounts.
Debt: £11,000 loan to finance law school studies.
Property: local authority flat.
Pension: £140 a month.
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