Wealth Check: Why this teacher needs lessons in saving for a home of her own
With no debts and a sensible approach to money, Sophie Williams should still make provision for longer-term investments, including a pension plan
Saturday 14 September 2013
Sophie Williams from south-west London is currently a lodger in a three-bed maisonette but is keen to move out and rent a place on her own, while also continuing to save hard for a deposit on her first home.
The 29-year-old has been teaching for five years, and for the past year has been earning a salary of £28,646 as a French teacher at a private school. However, she has just been promoted to head of languages and is now earning £33,978.
At present Sophie pays just £460 a month in rent, including bills, but is keen to stop lodging.
"I'd really like to rent privately," she says. "I'd also like to save for a deposit but am not sure whether I'll be able to do this on my own in London. As I work in a private school and am not employed by the local education authority, I don't qualify for key worker status. I've also looked at the Government's Help to Buy scheme, but have not found any properties in the area of London I want to live in (travel zones two and three) for less than £300,000. I'm worried that even with the help offered, buying my own place will still be unaffordable."
Sophie has been disciplined about slotting money away and currently has £6,500 in an easy-access individual savings account with Santander and also has £2,000 in her Nationwide current account.
"Since April I've been saving £400-£500 every month which is not too onerous given my low rent payments," she says. "However, house prices are starting to rise and are going up faster than I can save."
While Sophie had been paying into a pension for three years in a previous job through the Teachers' Pension Scheme, there is no pension plan offered at her current school. She also only gets two paid sick days a year.
"Part of me wonders if there is much point in me saving at all, but as I'm not part of a pension scheme at the moment, have no money in investments, and don't get paid if I'm off work ill, I feel I need savings to give me some security," she says.
Since April this year Sophie has tried to set herself a cash budget of £100 a week to cover expenses such as food, travel and socialising, in a bid to be able to save more.
"I have been quite good at sticking to this, and it's also made me think more before making purchases I don't really need," she says.
Sophie is in the fortunate position of having no debts other than her student loan repayments, and while she does have a credit card with Nationwide, she pays this off in full each month.
"Despite being quite careful with my money, I'm lucky that I'm able to live a good life, and can afford to take holidays and go out with friends," she says. "That said, I'm single at the moment, but worry about what will happen next, as I can't see myself being in a financially secure enough position to get married and have children in the foreseeable future."
Our panel of independent financial advisers agree that Sophie seems to have achieved a good balance between what she is earning, spending and saving, and commend her on being responsible with her money and not having any debts. They urge her to now focus on saving as hard as she can to build a house deposit, but also to balance her cash savings with longer-term investments, including pensions.
Continue to build up savings
Patrick Connolly from Chase de Vere says Sophie is being sensible in building up her cash savings, pointing out this will give her the best opportunity to meet her financial objectives in terms of property and potentially having children in the future.
"Equally, by having savings in cash, it will avoid the need for her to go into debt if she has any short-term emergencies," he says.
Minesh Patel from EA Financial Solutions adds that Sophie is also doing the right thing by putting her savings into a cash Isa.
"The rates are low but this fund will be needed for her property purchase and the interest is tax-free," he says.
Lisa Conway-Hughes from Westminster Wealth Management says she should regularly review the rate she is getting to ensure it is competitive. Useful sites are SavingsChampion.co.uk and Moneyfacts.co.uk.
Mr Connolly adds that current low rates mean that, after inflation, Sophie will be losing money in real terms,
"She needs to be wary of holding too much in cash for too long," he says. "Going forward, Sophie should not give up on saving, but should look to balance this with longer-term investments including pensions offering the opportunity to earn better returns."
Consider a flat-share
Sophie is paying relatively little in property costs as a lodger, but Mr Connolly warns this will go up if she moves into rented accommodation.
"Other than moving to an unsuitable property or area, the only real way for her to address this is to rent with other people and split the costs with them," he says.
Save hard for a deposit
Mr Connolly says the best way for Sophie to take the first step on the property ladder is by continuing to save as much as possible each month – especially now her salary has increased.
"Buying a property will seem like a very long-term goal, but while she is on her own there is unlikely to be a shorter-term solution," he says.
Mr Patel suggests Sophie widens her property search beyond zones two and three.
"She needs to consider less-expensive parts of London from where it will still be possible to commute to school," he says. "She should also consider options such as a guarantor mortgage from a lender such as The Mortgage Works or the Woolwich, where a parent's or other relative's income is used to secure higher borrowing."
Ms Conway-Hughes adds that Sophie should also think about options such as buying with a friend.
Don't neglect pension saving
The Teachers' Pension Scheme of which Sophie was previously a member is a great-quality plan with valuable guarantees backed up by the Government, according to Mr Connolly.
"However, three years' membership won't be enough to build up a sufficient level of pension benefits," he says.
Mr Patel points out that under new legislation, known as auto-enrolment, all employers will now have to provide a pension for their employees.
"In addition, both employers and employees will be compelled to make contributions," he says. "Sophie should find out when her school will implement a scheme, and start paying into it. Pension contributions benefit from tax relief and are a great way of saving for the future. Sophie should look to increase these from year to year."
In the meantime, she should start paying into a stakeholder pension.
"She needs to start a pension as soon as possible," says Ms Conway-Hughes. "She can always increase the amount she pays in once she's built up her deposit."
With cash accounts paying low rates of interest, Mr Connolly says there is an argument for Sophie looking at other forms of investments for any money she won't need for 10 years or more.
"She should look at both pensions and stocks-and-shares Isas," he says. "Pensions provide initial tax benefits but are quite inflexible, whereas stocks-and-shares Isas can also be tax-efficient and offer far greater flexibility."
Mr Patel says her attitude to investment risk needs to be identified.
"At 29, she has a longer time-frame for investing. An index-tracking equity fund – through a provider such as HSBC or Legal & General – could offer a cheap and effective method of investing for the longer term," he says.
Think about protection products
As Sophie has no dependants and no debts, she has little need for life cover, according to Mr Connolly. But
Ms Conway-Hughes says that as her sick pay is not very generous, she is very exposed financially, and urgently needs an income protection policy.
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