Wealth Check: On the case of a lawyer: 'where do I start with my finances?'
Each week we give 'Independent on Sunday' readers a financial makeover
Sunday 27 June 2004
Andy Tough's finances are a blank canvas. The 25-year-old lawyer, now settled in London after spending a year in Hong Kong, is eager to manage his money properly. But making a start is proving tricky.
"I'm just not sure which path to take with my finances - whether to invest, start saving properly, buy a flat or concentrate on my pension," he says.
"I presume each option will probably make a different sort of demand on my money. I'd like to know how best to use it."
He doesn't have much debt but, like many graduates, owes several thousand pounds in student loans. However, he is content to clear them slowly because of the low interest charges. "I've also recently paid off a graduate loan and have a Lloyds TSB credit card, though I don't use it."
So far, Andy has built up £12,000 in savings and continues to set aside £750 each month.
However, the money is doing very little in his Lloyds TSB current account. It is likely to be earning no more than a paltry 0.1 per cent interest, which is then taxed at his higher rate of income tax, making 0.06 per cent. "I know that £12,000 ought to be elsewhere, but I don't know if a mini cash individual savings account (ISA) or an equity ISA is appropriate."
Andy has yet to start investing in a pension but is prepared to address this. "I haven't begun to do so since I don't know if it's worth even getting into saving for my retirement yet."
Whether or not to buy a property also features high on his list of financial queries, especially since house prices in London have raced ahead during the past three years.
At the moment, he pays £750 as part of a shared rent on a flat in central London, near London Bridge.
However, finding a flat to buy would be a better option since it is usually a more effective use of money and is a long-term investment.
Apart from his rent and savings, he has no major monthly expenses.
He has neither income protection nor critical illness cover but thinks he may have some similar benefits as part of his employment contract with the law firm.
Interview by Sam Dunn
Andy Tough, 25, lives near London Bridge.
Job: a qualified lawyer, specialising in insurance.
Income: £45,000 to £50,000.
Savings: £12,000 with Lloyds TSB; puts by £750 a month.
Goal: to set a financial goal and make more efficient use of his money.
As long as he sets out a clear list of priorities, Andy can do a great deal with his money, our panel of independent financial advisers (IFAs) agrees.
If he chooses to save for a property, he will need an instant access savings account earning a good rate of interest. If he decides to invest for long-term returns, he can reap the greater financial benefits of locking money away.
But making the £12,000 work a lot harder is the top priority - followed by a pension.
Andy must decide whether to buy a home now or hold off for a number of years, says Anna Bowes of IFA Chase De Vere. "If he wants to focus on saving for a property, the money needs to remain available, so cash ISAs and savings accounts are appropriate."
Patrick Connolly of IFA John Scott and Partners agrees: "A reasonable deposit will make it easier to get on the property ladder and reduce the future mortgage repayments."
First, though, he must seek a much more competitive deal for his money ...
Switching £3,000 into a mini cash ISA will shield a chunk of his savings from the taxman, says Ms Bowes. "One of the best ISAs currently on offer is from Abbey, paying 5.1 per cent interest tax free."
She suggests moving the other £9,000 to a savings account such as ING Direct's. This will pay him 4.7 per cent gross (2.82 per cent after higher-rate tax) interest until he is sure of his next step.
Darius McDermott of IFA Chelsea Financial Services also suggests Alliance & Leicester's Online Saver account paying 4.85 per cent . And he recommends setting up a separate savings account with £4,000 - as an "emergency" rainy-day fund.
Now, if Andy chooses to delay buying a property and can afford to tie up his cash for five to 10 years, he could consider an ISA which invests in the stock markets. Mr McDermott recommends Cazenove UK Growth and Income or Liontrust First Income as core funds to make up part of an investment portfolio.
"Pension funds are still vital tools in retirement planning," stresses Mr McDermott. "If his company offers a scheme, he should join it. Otherwise, I would encourage him to start paying into a personal pension as soon as possible."
Ms Bowes says the earlier Andy starts, the easier it should be to generate a big enough pension pot to lead a comfortable retirement.
Using current annuity rates based on a male retiring at 60 with an annual income of £50,000 gross (roughly Andy's current salary), "he would need to build up a lump sum of around £782,000," says Ms Bowes.
The longer he delays, the higher the monthly premium needed to generate the same retirement income, she adds.
If his company has no scheme, Mr Connolly suggests investing in a stakeholder pension such as the ones offered by Legal & General and Norwich Union. This should be continued for a number of years before Andy considers whether to move into areas such as commercial property, investment funds or bonds.
"Without dependants and, currently, no mortgage, saving is his priority - not insurance," says Mr McDermott.
If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email firstname.lastname@example.org
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