Help me get on the property ladder
Julie Lever is a 29-year-old nursery assistant from Wood Green in north London. Following several years working as a retail manager, Julie decided to take the plunge and change career. She now works part-time while studying to gain a qualification that will enable her to pursue her ambition of combining childcare with her background in dance and performing.
She currently takes home around £618.68 a month, and her salary will increase to around £22,000 when she qualifies. At the moment, she lives with her parents, paying them £100 a month towards bills.
Julie has built up substantial savings: £30,000 in premium bonds; £7,465 across three individual savings accounts (ISAs); £1,000 in an easy saver account with Britannia; and £1,552 worth of index-linked savings certificates with NS&I on five-year terms.
Her main financial goal is to use this year’s ISA allowance to build up a deposit to buy her first home. “I want to make the most of my money, so I’m considering investing in bonds and shares,” she explains. “I’m also wondering whether I need life insurance, and I’m concerned that working part-time has affected my pension situation because of my reduced state pension contributions.”
Adrian Kidd, an independent financial adviser from Unleash Advice Partnership in London, was impressed by Julie’s financial situation and attitude towards money.
“She’s a savvy young woman, and has clearly received excellent guidance from her parents,” Kidd comments. “She has not run up any debts, so despite retraining as a nursery assistant, she has managed to give herself a great platform for financial success.”
With some careful planning, Kidd is confident that Julie can fulfil her priority to buy her first home. “She is looking to pay in the region of £200,000. On her current salary, this is way out of her league, but it will be more realistic when she qualifies and her salary increases,” he says.
Julie currently has £30,000 to put down as a deposit and has looked into the option of taking out a guarantor mortgage, which would involve her parents agreeing to be responsible for the mortgage if she struggles with the repayments.
“She should also consider the government’s HomeBuy Direct scheme,” advises Kidd.
HomeBuy Direct is a shared-equity scheme designed to help first-time buyers into affordable home ownership. First-time buyers who qualify for the scheme (if they have a combined income of less than £60,000) will receive an equity loan of up to 30% of a property’s purchase price, equally funded by the government and the property developer. Julie would be required to contribute the remaining equity – a minimum of 70% - through a mortgage and deposit.
There’s no fee for the first five years of the loan, but a charge is levied from year six onwards. Julie would be able to redeem the equity loan in instalments, purchasing up to 100% equity after the initial purchase by buying additional equity at the market rate.
“HomeBuy Direct is a great way for Julie to afford her first home; it would help her overcome the hurdles of high mortgage costs and large deposits,” says Kidd.
As Julie’s main priority is to get on the property ladder, her main focus should be to look into this option and increase her deposit. Despite the fact that she has expressed an interest in investing, Kidd advises Julie to keep most of her cash ready for instant access whenever the time is right to buy her new home.
However, he suggests she considers transferring her savings into a cash ISA to achieve a much better rate than the measly 1.85% she currently receives with Barclays.
Another of Julie’s goals is to find a decent regular savings account she can put her cash into after she has used her ISA allowance for this year. Kidd advises her to approach her bank, NatWest, about its regular saver account.
Next on the agenda is Julie’s pension planning. “She has missed quite a few years of contributions, but as she’s still only 29, there’s plenty of time to sort this out. But it would be worthwhile to start doing this now,” says Kidd. “While she will no doubt have access to her employer’s pension scheme when she’s fully qualified, there are benefits to having a few other options in place.”
Kidd says paying more into equity-based investments over a long period of time is the best route: “Julie agrees that with her current income she can afford a monthly net contribution of £40.”
Based on her age and the amount of time she has until retirement, Julie is comfortable taking a relatively high degree of risk. Kidd recommends a stakeholder pension from Scottish Widows to give her the best fund in terms of yield and size. He advises including some absolute return funds, commodities, ethical funds, some fixed income and a few global equity funds.
Life insurance was another of Julie’s concerns. But at this stage in her life (being single, with no dependants), Kidd says life insurance is not a priority. When she takes on a mortgage, he suggests that an income protection policy or critical illness insurance policy will be much more suited to her needs.
“Income protection is vital – we all tend to overestimate our earning potential, and what we would do if we couldn’t work,” explains Kidd.
An income protection plan will pay out a tax-free monthly sum until retirement if Julie were unable to work due to illness or injury.
Critical illness cover is designed to pay out a tax-free lump sum if she were to contract any one of a wide range of specified serious illnesses including certain types of cancer, heart attack or stroke.
Kidd believes Julie’s goals for the future are very realistic and that she is completely on track to achieve them.
“Adrian was fabulous,” says Julie. “I left the meeting feeling very motivated and confident about the financial choices I had already made, with increased clarity about how to reach my goals.”
Julie’s To–Do List:
Look into government’s
HomeBuy Direct scheme
2. Transfer cash ISAs to a more competitive account
3. Take out regular saver account
4. Start contributing to a private pension
5 Consider income protection and critical illness cover
Adrian Kidd is an independent financial adviser at Unleash Advice Partnership in London
Visit unleashadvice.com or call 020 7193 1097
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.