Wealth Check: 'My pension is fine, but can I invest more wisely?'
Saturday 26 June 2004
Ashley Agar works as a sales executive for a software company in the Thames Valley and at the moment is living with his parents.
Although he has no immediate plans to enter a property market where he feels prices are exorbitant, he would be interested to learn how much he could borrow, and what it would cost.
If he were to buy, his ideal areas would be Reading in Berkshire, or west London.
Mr Agar is comfortable with his pension arrangements, not least because of his employer's contribution and tax relief. But he feels he might be able to invest his money better.
He would like to put more money into the stock market, ideally through managed funds or a fund of funds.
He envisages making an initial investment of £5,000 to £7,000, in addition to his tracker fund.
ASHLEY AGAR, 34, SALES EXECUTIVE FOR IT COMPANY
Salary: £50,000 a year.
Debt: Repayments of £300 a month to parents for loan to buy a car (5 per cent interest).
Property: Lives with parents, pays £350 a month.
Savings: £9,000 with ING Direct (4.9 per cent interest); £1,000 with Portman Building society: £2,000 in current account with First Direct.
Investments: £1,800 in Virgin tracker Isa (£100 a month).
Pension: Five years' membership of Scottish Amicable, worth c. £20,000.
Outgoings: Monthly include petrol (£135) and mobile (£43).
We put his case to Justin Modray at BestInvest, Meera Patel at Hargreaves Lansdown and Matt Pitcher at Towry Law.
Mr Agar has done well to build up a reasonable amount of cash savings. But Mr Modray points out that, as a higher-rate tax payer, he should be taking advantage of cash Isas to maximise his returns. Assuming Mr Agar has set up his Virgin tracker fund as a mini Isa, he can pay up to £3,000 into a cash account.
Abbey currently offers 5.1 per cent on its mini cash Isa. Mr Agar would have to earn 8.5 per cent gross to equal this. Ms Patel says that he can earn more, if he is willing to tie up his money for longer: Lambeth Building Society pays 5.15 per cent, subject to 45 days' notice of withdrawals. Ms Patel suggests that Mr Agar should have a financial cushion of three to six months' salary for emergencies. Once he has set that aside, he can consider investments or shifting money from his current account to savings.
Ms Patel says that in order to put more money into the stock market, Mr Agar should be happy to leave it there for five to 10 years. Assuming he can do this, she suggests Cazenove's UK Growth and Income Fund, managed by Tim Russell, for an actively managed fund based on UK equities.
Mr Modray says that Mr Agar could split his investments, even if he were to invest just the mini Isa limit of £3,000. He suggests putting £1,000 into Artemis UK Special Situations, £750 into Cazenove European, £750 into Legg Mason US Equity and the balance into Aberdeen Asia Pacific.
In any case, Mr Agar should review his Virgin tracker which, with charges at 1 per cent, is expensive for a passive fund. Ms Patel suggests M&G's tracker and Mr Modray, Legal & General. Both have lower fees than Virgin. Mr Pitcher cautions that if Mr Agar does want to buy a property in the future, he should be wary of putting his savings into the stock market.
Mr Agar pays in pension contributions of six per cent of his gross salary. Mr Pitcher says this is reasonable for someone of his age. But he points out that if Mr Agar started paying into his pension in his late 20s, he will already have missed out on some significant growth. He will need to make this up with additional contributions. He should check his pension provider's annual forecasts of his retirement income. Mr Modray and Ms Patel both suggest that Mr Agar reviews the funds his pension plan invests in. He can afford to maximise his exposure to the stock markets. He can switch to safer funds as he approaches retirement.
Properties in Mr Agar's ideal areas - Reading and west London - do not come cheap. Mr Pitcher reckons that most lenders would agree a mortgage of 3.5 to four times Mr Agar's salary, based on his basic income and half his annual bonus. This would allow him to borrow up to £180,000.
Some lenders may offer more but Mr Pitcher believes this could work in Mr Agar's favour.
If Mr Agar were to buy now, Ms Patel calculates that a 90 per cent, repayment mortgage of £180,000 with Portman Building Society would cost around £1,000 a month. An interest-only mortgage would cost £659, based on the society's two-year discounted rate of 4.39 per cent.
Ms Patel cautions that although some lenders might agree to lend Mr Agar as much as six or even eight times his salary, this would be unwise with interest rates on the way up.
* If you would like a financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org
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