Wealth Check: 'I need to get my savings off the ground'

Each week we give 'Independent on Sunday' readers a financial makeover

The problem

Kristan Reed is focused on his property and has already spent thousands of pounds on his flat in north London, which he bought for £85,000 five years ago.

Helped by the buoyant housing market, the property is now worth £220,000, and Kristan plans to spend more money on home improvements, including a new bathroom and kitchen.

As an investment, he insists it is one of the best ways to store up wealth for the future. "At the moment, it's just my property that I'm interested in - all my savings are going into it."

His attention to bricks and mortar has, however, come at the expense of his retirement planning. "I don't have a pension but don't hear much that says they're a worthwhile investment," he adds. "However, I would like to start saving but am unsure where to go for the best deals."

He already has £15,000 in savings but this money is about to be swallowed up when he remortgages. His five-year fix at 6.9 per cent with Chelsea Building Society is coming to an end and he is switching to a Barclays Open Plan tracker that follows the Bank of England base rate. His new mortgage will be for £120,000 at 4.95 per cent. He will offset his £15,000 savings against the loan to help reduce the interest. "More than anything, I want to get the mortgage paid off."

Kristan has few other debts: after recently paying off a car loan, he has just £600 outstanding on student loans.

Although he doesn't have a pension, or any other investments, Kristan has bought two insurance products through Barclaycard. He pays £23 a month for critical illness cover but is unsure what protection this provides; he also pays £7.50 a month for cover in the event of accidental death. "Barclaycard sold me these two products, but I'm not sure if they are good value."

Interview by Sam Dunn

The patient

Kristan Reed, 31, lives in Willesden Green.

Job: editor of Eurogamer, a video games website providing news, reviews and consultancy and development services.

Income: up to £50,000 a year.

Savings: £15,000 in a cash account.

Investments: none, apart from property.

Goal: to whittle away the mortgage and pay for home improvements.

The cure

With glaring gaps in his financial planning, Kristan should first consider a pension, thinks Philippa Gee of independent financial adviser (IFA) Torquil Clark.

A mortgage review could also be worthwhile if interest rates rise significantly, says Ben Yearsley of IFA Hargreaves Lansdown.

Shopping around could give Kristan a better deal on protection, adds Justin Modray at IFA Bestinvest.

Retirement

"Pensions are a highly tax-advantageous savings vehicle," says Mr Yearsley. "Kristan should really be putting in the most he can afford; the longer you leave pension planning, the harder it becomes to accumulate a reasonable pot."

If he saves 5 per cent of his salary every month until he is 65, he might expect to receive a pension of about 22 per cent of his current income, says Mr Modray. A stakeholder pension, with low charges, would be the most cost-effective way of achieving this.

As a higher-rate taxpayer, he will benefit from 40 per cent tax relief on contributions; a £200-a-month payment would in effect cost him £120, adds Mr Modray.

Mr Yearsley suggests a self-invested personal pension (Sipp), offering a broad range of investment funds. "With 7 per cent annual growth, £250 a month invested for 20 years would give a pension pot of over £120,000."

If he forgoes pension provision, Kristan must consider the alternatives for his old age, says Ms Gee. "He needs to bring some savings on board and look at other investments such as individual savings accounts (ISAs)."

Mr Modray recommends funds such as Fidelity Moneybuilder Global and Jupiter Merlin Growth Portfolio as a starting point. An alternative way to fund retirement could be a buy-to-let investment in the housing market.

Property

Mr Yearsley and Ms Gee both cite the dangers of a variable-rate tracker mortgage when interest rates are rising.

"If rates were to increase by 1 per cent, he would pay an additional £1,200 [a year]," warns Ms Gee. She advises him to budget for this.

Mr Yearsley says a fixed- rate deal might provide better value than a tracker, particularly with some lenders offering rates of less than 5 per cent over two years. "Kristan needs to do the sums to see whether he benefits more by having a fixed rate and his savings in a [separate] bank account, such as ING Direct paying 4.41 per cent."

Investments

Although a pension should be a higher priority for Kristan, an ISA is also worth considering. Starting from scratch means he has the opportunity to build a balanced savings portfolio including shares and cash.

As well as those investments recommended by Mr Modray, Mr Yearsley suggests a UK equity fund such as Cazenove UK Income & Growth.

Protection

Since he has no dependants, life cover is not an essential expense for Kristan. However, a review of his Barclaycard policies is worthwhile.

"If Kristan is a non-smoker, his current policies look expensive," says Mr Modray. "By shopping around, he should be able to secure £100,000 of life and critical illness cover for less than £22 a month."

If you would like a free financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email m.bien@independent.co.uk