Wealth Check: 'Should I focus on a house or my pension?'
Christian is just starting work, and he might be better served putting money towards a deposit on a first home than preparing for retirement
Sunday 02 September 2012
Christian Strand, originally from Norway, is keen to save up for a house deposit now he has settled in England.
"I came here four years ago to study business administration, and I've just started my first job," says Christian, 23. "And since I want to stay in this country, I would like to start focusing on building a fund to buy my first home."
However, he knows this will be a struggle on his earnings of £24,000 as a business development associate for a financial services company. His biggest outgoing is rent of £475 a month for his room in a two-bed flat in Ealing, West London.
"Ideally, I'd like to save up for a deposit, while at the same time keeping my pension contributions high for long-term planning," he says. "I'd like to put away around £40,000 so that I can buy a property of around £150,000 at some stage, although I realise this might not get me anywhere in London."
However, he already has a pot of investments, with around £18,000 in various shares and funds with a Norwegian broker. "But now I'm working in the UK investing here is more likely than transferring money back to Norway, and I'd like to know what to do with this money," he says.
This pot is from a family inheritance, and includes shares in Apple, the Norwegian oil and gas company DNO International and the pharmaceuticals company Forest Laboratories. "The other half is made up of funds which include US growth, Norwegian growth, Norwegian index and global index funds," he says.
Turning to debt, he has a £46,000 Norwegian student loan used to pay for his education in England, which costs about £300 a month. "But this will be paid off gradually, and I'm not worried about it," he says.
For long-term planning he has signed up to his company's money purchase pension scheme, into which his employer pays 10 per cent. Christian has decided to match this contribution.
For protection purposes, he receives life insurance through work of four times his salary. "But I think I need to review my cover requirements as I want to make sure I'll be OK if I get ill," he says.
Christian is sensible to consider his financial position at this stage. However, his priorities should be saving for the short and medium term, with pension planning and protection put on the backburner, given his age and situation, according to our panel of independent financial advisers (IFAs).
Saving to buy a property
Christian's goal of buying a property is some way off being met as he needs to build a significant fund and see a salary rise before taking the plunge.
How he invests his savings for a flat purchase depends on how long it's likely to take him to reach his goal, says Alex Pegley at Calculis Financial Planners.
"If it's likely to take longer than five years, then he can consider investing in a diversified portfolio of unit trusts or through a fund of funds," he says. "Jupiter's Merlin range is well managed and has delivered good returns, for example."
If Christian is willing to invest for the medium term to build his capital – and accept the associated risks – the first port of call is an investment ISA into which he can save up to £5,640 annually. He can slot a range of funds into one of these wrappers.
Kusal Ariyawansa, at Appleton Gerrard Private Wealth Management, suggests that Christian should work together with an adviser to decide on his attitude to investment risk and then choose a mixed portfolio of fixed interest/corporate bonds and UK equity income unit trusts or investment trusts.
Otherwise, if the time period is likely to be shorter, a savings account makes more sense, and he should opt for a tax-efficient ISA. For example, Coventry Building Society is offering a cash ISA paying 3.25 per cent until April next year. As Christian is resident for tax purposes, this is an option.
Saving through cash also means his money will be safe in absolute terms, and available when he needs it rather than subject to the vagaries of the stock market. However, he should ensure he maximises his money. Sites such as Moneyfacts.co.uk are useful to scour the top rates on savings accounts.
He can also use cashback sites such as Quidco to make money on day-to-day purchases.
Short-term share investments are always a high-risk strategy.
Mr Pegley warns that there is a currency and investment risk with Christian's Norwegian holdings.
"Over the past five years the krone has done really well against sterling – up 27 per cent – although over the last year it's down about 5 per cent," he says. "So he might want to consider shifting these investments to the UK to avoid the risk of the krone falling suddenly – but should seek advice before doing this."
Mark Wapshott at St Edmundsbury Financial Services, adds: "There are few tax incentives in Norway and he will be paying tax on his dividends, so bringing the funds into the UK, where we have greater tax incentives, would assist in saving."
However, it depends on whether Christian sees his Norwegian investments as part of his long-term savings, or if he wants to put them towards medium-term goals. Investments need to have a purpose, Mr Ariyawansa stresses, "as what they're for will determine what he does with this pot".
In the UK he could use a platform, such as FundsNetwork, where there are 1,200 funds from more than 70 leading fund providers. Switching between providers is easy.
The advisers agree that Christian is unusual for a young man in that he's paying too much into his pension.
Mr Pegley says: "For Christian to start saving effectively, he should drop his contribution to 5 per cent of salary." He would still benefits from his employer's contribution and can increase his own contributions once he's bought a flat.
As Christian is single, has no dependants and only his student debt, he has limited need for most protection products, the advisers say.
However, Mr Pegley says: "As Christian's employer provides him with life assurance, which he doesn't need, he should ask if they offer a flexible benefits package. This would enable him to swap this cover for something more relevant to him."
If they don't allow this, he should at least ensure he has completed a death benefit nomination form. "I've seen some truly shocking results where death benefits resulting from a young person's employer's benefits package have been paid-out to inappropriate people," adds Mr Pegley.
Christian's greater need is to insure his income in case he's unable to work through ill-health, so he could consider a simple income protection policy.
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