Wealth Check: 'Running costs of our first home are always more than we budget for'
Saturday 09 October 2010
Nicola Coleman is an assistant accountant training to become aCertified Accountant by 2013, which could see her income rise dramatically. She recently bought her first home in Epsom, Surrey, and her main financial concerns are her mortgage and living expenses.
"I have been in my job for 21 months and have just bought a home worth £150,000," she says. "I also want to think about the future and my main goal for investing money is to help towards my pension and retirement."
Nicola is not married and has no children so she hopes to use extra funds from her steadily increasing pay to secure her long-term financial position.
"I am not currently contributing to a pension scheme, however, it is likely I will have the option through work within the next two years," she adds. "I would like advice on savings and investments which I can afford once the cost of living has been deducted from my monthly income."
Annual income: £24,000 (increasing by £1,500 every quarter)
Savings: £1,000 in an ISA
Offering advice this week are David Brunning of Brunning Newman Houghton, Brian Tabor of Carematters, and Robert Forbes of Plutus Wealth Management...
Budgeting and protection
"Nicola's situation is stronger than many people of her age but she needs to be very careful," says Forbes. "She needs to have an emergency fund of three months' outgoings and she should look at low-cost income protection insurance to provide a fallback if she's ill and unable to work."
"The provisioning and running costs of our first home are almost always higher than we budget for, so it is important that Nicola commits to few long-term financial plans such as a pension arrangement until these day-to-day costs are known," says Tabor. "Nicola has no financial protection in place to deal with the financial effects of long-term illness. While statistically unlikely, serious and long-term illness can strike us all and scupper the best financial planning."
Brunning agrees, saying: "Nicola makes no mention of life assurance or other arrangements to support her lifestyle or mortgage payments in the event that she fell seriously ill or died, which is an important oversight."
Brunning also says Nicola should increase her reserves to £4,500 – three months' household expenditure – as an emergency fund.
"Having built up her cash reserves to a realistic level, Nicola should turn her attention to creating capital," says Brunning. "She should use the tax benefits offered by ISAs – several companies offer regular premium investment ISAs starting from £50 per month."
Nicola must be able to react to changing circumstances, according to Forbes. "In the short term, maintaining flexibility is the key to building Nicola's wealth," he explains. "Keeping money in an ISA gives her the flexibility of paying off a chunk of her mortgage in 2012 (when her fixed rate comes to an end) if the economic circumstances make it necessary, which could give her access to better loan-to-value mortgages and better rates."
Pensions and retirement:
"I believe that in the next couple of years Nicola should only invest in a pension arrangement if her employer is also willing to contribute or she becomes a higher tax rate payer," says Tabor. "If neither of these applies and she has saved sufficiently into her 'buffer' savings, she might consider saving regularly into a 'stocks and shares' ISA. This can be subsequently accessed at any time to transfer into a suitable pension arrangement, support any changes to personal or family circumstances or perhaps help with the costs of future house moves."
Forbes agrees, saying Nicola would be better contributing to an ISA rather than a pension until she becomes a higher rate tax payer. "Under the present tax rules she would gain twice the tax relief when she is a higher tax rate payer in a couple of years' time," he explains.
"Nicola has taken a realistic view on her likely retirement age of 68, which gives her 40 years to set aside sufficient funds to support her through retirement," says Brunning. "Her target is a net annual income equivalent to £25,000 in today's terms. If we assume inflation at a steady four per cent, then her target incomes becomes £144,000, needing a pension fund of £2.9m at current annuity rates. Essentially, she needs to start contributing as soon as possible."
For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email email@example.com
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
10 tips for taking out a personal loan
Weekly Money: Round-up of the personal finance stories you may have missed 26-30 January
City Watchdog to investigate banks' handling of PPI compensation claims
How to start your own internet business
- 1 Woman falls to her death as she celebrates marriage proposal at the edge of Ibiza cliff
- 3 Dad attempts revenge on teenage daughter, plan backfires spectacularly
- 4 Ball pool for adults opens in London
- 5 Amal Clooney gives excellent response to fashion question at European Court of Human Rights
9 reasons Greece's experiment with the radical left is doomed to failure
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion