Wealth Check: 'Student debt comes well before pension payments'
Saturday 14 October 2006
Andrew Alcott, 23, is an assistant stock planner at Tesco in Welwyn Garden City, earning £20,000 a year. His first goal is to pay off the sizable debts he accumulated while at university. He aims to conquer his credit card debt and overdraft by the end of this year before starting to save towards a flat in London.
Although Andrew would like to be paying into the Tesco pension scheme, he says other concerns must take priority - first the debts and then paying off a mortgage. Andrew has a small amount in his current account, and all his savings are in shares, distributed over several companies. But he does not want to use this money to pay off debt and would prefer to use it as the basis for future savings.
He wants to retire between 55 and 60 on an income of £10,000 a year, but is concerned about how to balance paying off his debts and saving for the future.
We asked three independent financial advisers for their help: Jock Cassidy of Ashley Law, Suzanne Cox of Carterbar Holdings and Rick Eling of Buckles Investment Services.
Case notes: Andrew Alcott, 23, assistant stock planner
Salary: around £20,000
Savings: £10,000, the bulk of which is in shares
Debts: £15,000, including student loan
Outgoings: approximately £500 a month, including contribution to family expenses
The amount due on Andrew's student loan, says Cox, will be about £40 each month; with a little discipline there is space to pay off other debts.
Cassidy recommends a two step approach to Andrew's priority of clearing his overdraft and credit card balances. Some banks, he says, offer 12 months' free overdraft on new accounts up to a limit of £2,500. If Andrew were to transfer his overdraft and not risk high interest rates by exceeding the agreed level, he should be able to avoid interest charges provided he achieves his goal of paying off the debt within the year.
Similarly with the credit card balance, a large number of credit card companies are offering 0 per cent interest rates for a year. The only cost would be a transfer fee, typically 2 per cent.
All the advisers agree that once these debts have been settled, contributing to a pension scheme should be a top priority for Andrew. If he can join the Tesco scheme, he will benefit from a contribution from his employer, as well as tax relief on his own contributions.
Eling says that although Andrew's goal of retiring on a pension of £10,000 may seem modest he calculates that £400 a month would be required immediately to achieve this goal. Delaying retirement until 60 or 65 would have a significant impact on these figures, so Andrew "might have to be more realistic about when he decides to retire".
The Tesco pension plan can still be an attractive one, says Cassidy. The contribution for most new entrants to company schemes is usually only 3 per cent of their earnings - or £39 a month for Andrew. Boosted with tax relief, this would amount to £50, and it is likely that Tesco would match this payment, increasing the amount saved to £100.
Minimum contributions will increase the longer he puts off making payments, and of course this lower monthly contribution will mean much higher catch-up payments in the future.
Most of Andrew's savings are in shares, and Cox says that even with these held in numerous different companies, this is a higher risk strategy than he should follow. If capital gains tax can be avoided, he should sell these holdings and move the money into various high-interest accounts.
If he is comfortable with the idea of internet banking, an internet based account might be the best way to save. The best place for the money is a cash individual savings account, though only £3,000 a year can be paid into these accounts. In addition, £4,000 could be moved into a stocks and shares ISA.
Cassidy recommends a cash ISA with Ipswich Building Society, which pays 5.4 per cent a year to monthly savers. Habits of saving, he notes, are much easier to keep than to start. The best way to start a good savings habit would be to open a current account with Alliance & Leicester to take advantage of a "market beating" 12 per cent annual interest rate.
Andrew has a goal of buying a flat in London within the next few years. Eling warns that London flats are now well out of the price range of most first-time buyers, and with his current salary it would be unrealistic for Andrew to expect to be able to afford a mortgage.
Andrew's goals rely on him having a steady income, so the advisers also suggest that Andrew take out income protection insurance. He has no need for life assurance, says Cox, as he has no dependents. Eling says premiums on these should be quite affordable at the age of 23, and worth paying given the effect incapacity could have on his finances.
"Andrew's financial goals are certainly achievable within his current income," says Cassidy. "As with all financial plans this one should be reviewed to take into consideration changing priorities and income changes that might enable him to fast track his plans."
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail email@example.com
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