James Michie, 26, lives in Thetford, Norfolk and has just bought his first home with his girlfriend, although he's yet to move in. With the help of his family, James saved up £7,000, but this went on the deposit, stamp duty and furniture.
James works as a customer service manager for a car dealership. His employers do not offer a pension scheme. James wants to retire early, but this isn't likely unless he finds employment with a larger car manufacturer.
He has a savings account at Norwich & Peterborough Building Society, but has been unable to save much while trying to buy a home. Once he's settled into his new property, James hopes to save enough to go skiing early next year, on top of the monthly bills.
We asked Ian Smith of Central Financial Planning, Robert Lockie of Bloomsbury Financial Planning and Anna Bowes of Chase de Vere Financial Solutions for advice on James's situation.
Anna Bowes suggests building up some cash for short-term expenses and emergencies now that James and his partner have used up all their savings. They should use cash individual savings account allowances - they both have a £3,000 allowance each year.
Currently, the best rate available is with Alliance & Leicester, which is paying a rate of 5.40 per cent tax free, although there is a £25 penalty if they transfer to another provider in future. Yorkshire Building Society offers an easy-access cash ISA paying 5.20 per cent, with no transfer penalties.
Robert Lockie agrees. He says it's worth having short-term savings for planned events such as James's holiday so he doesn't need to borrow: debt is best reserved for acquiring assets that can be expected to rise in value at a faster rate than the cost of the borrowing.
The easiest way to ensure that James builds up such savings is to have them transferred to his deposit account. Internet deals offer the highest rates (see page 13) via a standing order each month so that he's not tempted to spend it. For example, ING Direct pays 5 per cent compared with the 3 per cent on offer from James's N&P account.
Lockie stresses that a private pension plan is only one way of saving for retirement, although, as it offers tax advantages and an element of insurance against living longer than expected, it is probably the most common vehicle for retirement planning. However, the overall tax advantages compared to funds held within an ISA are not particularly great unless James is expecting to be paying a lower rate of tax after retirement than he does now.
As James's employers do not offer a pension scheme, Lockie recommends he establishes his own. Stakeholder plans charge less than 1 per cent a year. Bowes also thinks a stakeholder pension would be appropriate: even though these sometimes have limited fund choices, the range should be sufficient for James in the early years.
He should consider investing in shares - these may be volatile but should outperform over time. James should choose a company with good fund choices, such as Legal & General or Standard Life.
Bowes says James should invest as much as he can, as he will receive basic-rate tax relief on contributions: for each £100 he invests, the Government will add £28. He will not be able to access this money until at least age 55, which is why it's important to have other savings.
Ian Smith recommends buying life insurance for the mortgage and joint debts. Income protection in case he is sick long-term is important, given that he has little savings and high costs. James should check his sick-pay arrangements with his employer, and consider an income protection policy to provide income when his employer stops paying.
Lockie adds that, as a guide, the longer the deferred period and the earlier the cessation age, the lower the cost, and vice-versa. Maximum cover is usually 50-60 per cent of pre-incapacity net income, but benefits are tax-free.
Assuming a salary of £20,000, Bowes says James could get income protection cover of just over £10,000 tax-free a year, for a premium of less than £10 a month, from Liverpool Victoria. This assumes a deferment of six months and would pay out until age 60 or recovery.
Alternatively, he could consider accident, sickness and unemployment cover. To cover the mortgage payments of £715 a month could cost between £16.30 and £22 a month, depending on the details. Alternatively, term assurance, covering a declining sum as the mortgage debt falls, is possible. This could cost as little as £7.33 a month. Such cover would only pay off the mortgage.
James Michie, 26, customer services manager
Monthly income: Around £2,250, but this includes his partner's earnings.
Property: James and his girlfriend have just bought their first home together in Norfolk, though they have yet to move in.
Savings: None: James's savings have been eaten up by all the costs of his recent house purchase.
Pension: None - although James wants to save for old age, his company does not offer an occupational scheme, though by law it must provide access to a stakeholder pension if there are more than five staff.
Monthly outgoings: around £1,800, but James and his partner are not sure yet what their monthly bills in the new property will be.
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