Wealth Check: 'We need to start making provisions for our future'

Jez Poole, 38, is a freelance graphic designer from Powys, Wales. He lives with his wife, Katie, a self-employed PR consultant, and his two children – Ben, eight, and Charlie, three.

Up until now the pair have concentrated on their immediate needs, but living on the breadline with no savings or pension is becoming a worry.

Jez says: "Our current home needed a fair bit of renovation work and as a result we are not as financially secure as we would like to be.

"Our specific query is whether it would make sense to use the money to over-pay our mortgage, or whether we should start paying into a pension."

Case notes

Annual income: £29,000 (£84,000 joint)
Annual expenditure: £21,450 (£48,400 joint)
Savings: None
Debt: £7,200
Property: £280,000 house with a £160,000 mortgage at 3.99 per cent for the first two years Pension: None

Advising him this week are Marc Ruse from Fiducia Wealth Management Limited, Dennis Hall from Yellowtail Financial Planning and Danny Cox from Hargreaves Lansdown...

Emergency fund

Being self-employed can be unstable, especially during a recession. Jez and Katie need to build up a fairly accessible emergency fund, and Ruse recommends National Savings Premium Bonds.

"There's no magic number when it comes to setting aside funds for emergencies," he says. "But they should look at between three and six months' worth of net income – say between £15,000 and £30,000."

Debt

Another immediate priority should be paying off the £7,200 loan. "It is common for people to question whether they should repay debt or invest for the future," says Cox. "In my view, people should repay expensive debt first."

The mortgage debt is also expensive, although this would take significantly longer to pay off. Ruse suggests at least making a dent in that loan by making over-payments before putting money into long-term investments.

Retirement

Jez should get a basic state pension at the age of 67, which in today's terms would be equivalent to £4,953 per annum, according to Hall.

But he hopes to retire at 60 on a joint income of £40,000 per year, which seems unrealistic.

Hall says: "To create a fund that size you would need to put aside over £2,400 each month."

Retiring at 67 would allow Jez to access the state pension immediately and give any private pension a few more years to grow, bringing monthly payments down to £900 before tax relief.

Cox warns: "These numbers look a little frightening and it would be easy to take one look and think that since they cannot afford to save the whole amount they should not bother.

"On the contrary, even if the amount they might be able to save was a 10th of this to start with, they should do so."

Pension scheme

Cox thinks a low cost Self Invested Personal Pension is probably the fastest growing private pension. This offers the best investment choice at a low cost.

He adds: "Low cost SIPPs use fund supermarkets which make the management of a pension easier and cheaper.

"Jez should consider stock market funds in their pension. For a core holding I prefer UK Equity Income."

Savings

Savings take second priority to reducing debt, but the more that can be saved now, the higher the rewards will be later. Ruse says it's best to compliment any private pension with substantial investments.

"I think it's better to think about planning for financial independence rather than just investing in a pension to provide income at a certain age," he says.

"Investing in ISAs will be a good place to start, and of course money accumulated here can be transferred to pensions at a later date."

Insurance

The Pooles need to check they have protected their incomes against sickness – especially as they don't have company schemes to support them.

Hall suggests taking out Family Income Benefit, which can provide a high level of initial protection for a relatively low cost.

For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email wealthcheck@independent.co.uk.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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