At the age of 28, Lucy Williamson Hodge, a scientist from Oxfordshire, still has five years of study ahead of her before she will be able to get a full-time job.
Currently midway through an engineering doctorate in nanotechnology for healthcare at Herriot-Watt University, the chemistry and molecular physics graduate expects to complete her PhD in 2012 before embarking on two further years of study abroad and returning to the UK to apply for jobs in 2014.
She is keen to buy a property but is concerned her limited savings will hold her back. "A few years in the future I'll want to settle down, put down roots, and maybe start a family. I'm aware that it is possible to live steadily and securely in rented accommodation but it's not the same feeling," she says.
Ideally, she would like a small, two-bedroom family home with a garden in the Midlands, where she is from. She has approximately £20,000 in a cash ISA and is earning £1,625 a month in a tax-free stipend. Her present rented accommodation in Harwell chisels away £635 per month, and she spends another £550 (£100pcm on utilities, £50pcm on travel and £400pcm on food and entertainment). Despite her extensive academic background she has managed to avoid building up any debt and has no dependents.
Getting on the property ladder
Frank Cochran from Wolverhampton-based financial planning firm FSC Investment Services says Lucy will need to get a move on with saving. He says that in order to make the most of her £20,000, she should consider shifting it from a cash ISA to an investment one.
"Given that Lucy has some disposable income every month I would recommend that she considers transferring her existing cash ISA which is only going to be producing her a return of no more that 2-3 per cent into a full stocks and shares ISA."
"Using a fund supermarket, such as Skandia Selestia or Transact, would give her access to a full range of funds and, assuming she is still OK with a moderate amount of risk, I would suggest splitting it into 20 per cent Black Rock Gold and General Fund, 20 per cent Black Rock UK Special Situations Fund, 20 per cent Fidelity Moneybuilder Income, 25 per cent Investec Cautious Managed Fund, 15 per cent Jupiter Merlin Balanced Portfolio Fund. This portfolio will give enough exposure to risk to potentially bring a handsome return but enough low risk to give balance to the investment."
As Lucy is considering buying a property alone, Mr Cochran recommends she look at different types of home ownership schemes.
"Lucy could begin looking at the possibility of a shared ownership property. These are available from housing associations and they will retain some of the equity in the property whilst Lucy buys the balance on her new mortgage, this keeps it affordable. When she has accumulated more income or some additional funds she can purchase more of the equity until she fully owns the property."
Building up a nest egg
Although Lucy is a long way from retiring, she is in an excellent position to begin saving into a pension. Regular saving now will have time to grow over the next three and a half decades.
Graeme Mitchell, the managing director of Galashiels-based Lowland Financial, says the best way to do this is by adopting an affordable savings plan. "Lucy is in the early stages of planning for her future so she needs some solid foundations, and the best way to start is to save what she can afford every month. If lump sums are available later – they can be added too. The two most relevant options for Lucy's longer term savings are pensions and ISAs. Both have fairly generous contribution limits and a range of tax breaks which should significantly improve the potential returns compared to other investments at 60.
"There are many different pension plans available but if she is starting out with £50 per month I suggest a stakeholder pension which has low costs – typically 1 per cent per annum – so just £7.50 in the first year. Despite having no 'taxable earnings' she will be allowed to pay £3,600pa into a pension, but if she goes abroad this will need to be reviewed."
The effects of compound interest means that a relatively small monthly saving will grow substantially over many decades making it really beneficial for Lucy to begin saving now. Mr Mitchell calculates that if Lucy begins saving £50 per month into a pension which delivers an average return of 5 per cent per annum – a standard rate offered by most pensions in the UK – she could expect to have a pension worth £50,000 by the time she is 60. But if she waits five years to begin saving, the pension would only be worth £36,900.
While Lucy is doing everything she can to qualify herself for a career in her chosen field, she will also need to consider the likelihood of unexpected events occurring, and the possibility of unemployment.
Steve Danson, a chartered financial planner at Preston-based financial planning firm Elementum, recommends she think carefully about insurance. "I would like Lucy to consider the implications of working or studying abroad. She may wish to consider medical and travel insurance needs. We often take the NHS for granted but, while other countries may well have the expertise and the equipment, many have a pay-as-you-go service and a system based on private medical insurance.
"Lucy also needs to think about income protection cover. The purpose of this cover is to replace some of her income in the event of long-term illness. The important feature of this type of cover when compared to accident and sickness cover is that the benefit would continue to be paid to you for as long as you are ill until the term of the policy expires, which is normally retirement at 60 or 65."
And as well as protecting herself with insurance, he adds that she would do well to save for a rainy day.
"When committing capital as a deposit for a house and then committing salary to pay the mortgage and other costs, Lucy should ensure that all bases are covered and provision is set aside for emergencies. So Lucy should aim to have additional savings. These savings should cover the costs of furnishings, repairs and improvements that she would like to carry out, but importantly should also provide a buffer in order to cover the unexpected expenditure which may arise," Mr Danson said.
Do you need a financial makeover?
Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF