Wealth Check: 'What should I invest in after I settle my debt?'

A young bachelor wants to know if he has a good mortgage deal and what he should be saving for a good pension
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Rob Blackhurst is editorial manager for the Foreign Policy Centre, a London-based think-tank. It was established by Tony Blair in 1998 with a mission to analyse UK foreign policy from a centre-left perspective.

"We were part of the agenda of the incoming Labour government," Mr Blackhurst says. "Before we were established there were traditional places, the Royal Institute of International Affairs and such."

Mr Blackhurst, 27, joined in 2002, having been a civil servant in the Cabinet Office and the Department of Trade and Industry. His responsibilities include directing press relations and commissioning the centre's pamphlets. "We produce 10 a year," he says. "They don't simply deal with straight foreign policy. We also try to cover issues such as drugs and globalisation."

He left Sheffield university five years ago and aims to pay off his student loans by March. "I've been paying £70 a month since 1998," he says. "I'm one of the lucky generation of students who didn't have to pay tuition fees. I took out only £4,000 in loans. Many people in their early twenties will be graduating with debts of £15,000 or more."

Unlike his former employer, the Foreign Policy Centre does not offer a pension scheme so Mr Blackhurst has taken out an HSBC personal pension.

"In the civil service you're got this huge, generous scheme so when I left I thought I better get something. I've been in this HSBC pension for three and a half years. I started paying in £130 a month for a year but indiscipline got the better of me. I'm putting about £25 a month in at present but I'd like to know if that's worthwhile considering their fees."

Mr Blackhurst used up his savings when he bought a flat in Walthamstow, east London two years ago for £100,000. He took out a discount rate mortgage with NatWest and put down a 10 per cent deposit. He recently remortgaged, switching to a Bristol & West base-rate tracker.

He calculates that his repayments should fall from £530 to about £470. "Have I got a good mortgage deal?" he asks. He is happy with his flat, which is now worth about £130,000. It is also convenient for work. His offices are in Waterloo, near the London Eye, and he commutes daily on the Victoria line.

We put his case to Roger Davies, financial planning consultant at Momentum Financial Services, Kevin Anderson of Budge & Company in Harrogate, Chris Petrie of Christopher Charles Financial Services in Northampton and David Holbrook managing director of Hallmark-ifa in York.


Status: Single;

Occupation: Editorial and communications manager of the Foreign Policy Centre;

Education: John Cleveland College comprehensive in Leicestershire; Sheffield university;

Salary: £25,000;

Debts: Student loans will be paid off in March

Motoring: None;

Savings: None

Pension: HSBC personal pension;

Property: One-bedroom flat in Walthamstow, east London;

Outgoings (per month): Travel card £90; council tax £70; gym £60; broadband £30; mobile £50; utility bills £50; landline £40; ground rent £20; gas £20; mortgage repayments £530.

Solution 1: Mortgage

Mr Petrie says Mr Blackhurst has a good deal with Bristol & West's tracker mortgage, which will rise or fall directly with base rates (presently set at 3.75 per cent). Rates are likely to go up this year so a fixed-rate deal may have been worth considering but given Mr Blackhurst has recently completed the remortgage, it would not be advisable for him to go to the expense of changing it again so soon. Also, rates are unlikely to go above 4.5 per cent this year. Mr Blackhurst should review the options again in a couple of years, in case better deals are available.

Mr Anderson says Mr Blackhurst should be prepared for increases in his repayments when interest rates rise. He should also find out whether any increases (or decreases) are fed through to his mortgage annually, or when rates change. Mr Davies says tracker mortgages provide value in several ways: A lender will not necessarily reduce their standard variable rate by the full amount of a reduction in the base rate, particularly if base rates are low.

Also a lender will always reduce its tracker mortgage rate by the full amount of a reduction in the base rate. Finally, a lender may offer a tracker mortgage for the full term of the mortgage which will enable clients to make comparisons at any time with deals from other lenders.

Solution 2: Pension

Mr Holbrook says Mr Blackhurst should review his HSBC policy and ensure he has a "stakeholder" type of plan. This should keep his charges to a minimum, even at the low level of contributions he is making at present.

Mr Blackhurst should consider increasing his contributions, subject to affordability and build some other form of flexible savings, such as a mini-cash Isa. Mr Petrie says Mr Blackhurst will have a small pension from his time with the civil service, but that will be far too small for his requirements at retirement age. Putting £25 per month into the HSBC plan is not enough.

When Mr Blackhurst's student loan ends in March, he should invest the surplus £70 per month into his pension plan. Because of the tax relief, he will have an extra £89.74 invested. In the longer term, even this higher amount will not be enough, but it is a better start than he is making at present.

The basic state pension is just under £80 per week, and he will also be paying into the state second pension (S2P) through his national insurance contributions, which will provide a further pension. If he completes the Department of Work and Pensions form BR19 (available from his local tax office), Mr Blackhurst can get a good estimate of what he might get from the state scheme at pension age.

Mr Anderson says the government allows Mr Blackhurst to pay up to 17 per cent of his earnings into a pension. He spends over £120 on telephone and internet and he needs to divert some of this into saving for his retirement. He should at least revert to his original £130 per month contributions and look to review this upwards each year.

Solution 3: Insurance

Mr Petrie says since Mr Blackhurst is single and has no children he has no great insurance requirements. The one plan he should consider is a critical-illness policy which pays out a single lump sum on diagnosis of a such an illness (in practice most claims are for cancer and heart disease). Premiums are likely to rise, but he can lock into a guaranteed rate now. For instance, a £50,000 lump sum cover would cost £18.29 per month with Standard Life (assuming non-smoker rates) for him until age 60.

Mr Holbrook says Mr Blackhurst should also get quotes for permanent health insurance (to protect his income in the event of long-term incapacity) and mortgage payment protection insurance (to ensure his mortgage his repaid should he unable to work or made redundant).

Solution 4: Savings

Mr Petrie says Mr Blackhurst should begin saving towards a rainy day fund of up to three months of income. He should use cash deposit accounts as he should not risk his capital. He recommends a cash-Isa through a bank or building society so interest is earned gross without income tax payable. You can typically get around 4 per cent with the best high street building societies, and possibly slightly more using internet banks.

Mr Anderson thinks Mr Blackhurst should have sufficient spare cash to save £100 a month into a cash Isa savings plan. When his student loan is repaid in March he should also consider a regular saving of £80 into a stocks-and-shares Isa.

Mr Holbrook recommends an Intelligent Finance mini-cash Isa which is offering 4.35 per cent a year gross.

If you would like to be given a financial health check-up, write to: Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.

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