Pick the right strategy for saving a deposit

Dariusz Majkut, 35, is a support worker from Bristol. He lives with his wife, Malgorzata Dziubalka, 31, also a support worker, and their baby son, Oliver, who is nine months old. Both work for local care home the Bradbury House Organisation.

The couple came to the UK from Poland five years ago and plan to take up permanent residency here.

Together they bring home around £2,060 a month, and are currently renting a flat in Bristol, paying £600 a month.

The pair have £1,000 in an HSBC current account paying 0.05% interest, and an additional £15,000 in a flexible saver account, also paying 0.05% interest. Each also holds £5,400 in an HSBC cash ISA earning 1.19% interest.

They also hold two credit cards with HSBC and Tesco,
paying the balance off in full each month. Both hold stakeholder pensions with Scottish Widows, with a £34 employer-only monthly contribution.

Dariusz and Malgorzata would like to save for a deposit on a house, but at present they find savings rates disappointing and are looking to the stockmarket for better returns on their cash.

Ultimately, they want to provide a safe financial future for their family. 

"We came to England over five years ago, and during that time we have been able to save a substantial amount of money. But it's not worth putting money in a savings account due to very low interest rates. For this reason, we want some advice on investing our money in the stockmarket," says Dariusz.

Balance risk and reward

Before making any investment recommendations for the couple, John Reilly, managing director of Goodwill Financial Services in Bristol, worked out their risk profiles. Dariusz's attitude to risk is very aggressive, whereas Malgorzata is more cautious.

"It's quite common for couples to have different attitudes towards risk and this can raise issues about where to invest their capital. Dariusz may be disappointed with the potential returns of more cautious investment strategies, but Malgorzata could lose sleep over the risk of investment losses in the more aggressive portfolios," says Reilly.

He suggests taking a compromised approach to investing that matches their attitude to risk averaged out between them.

With the property market in the doldrums, Reilly believes investing in the stockmarket is the best way to build up a deposit. "Few economists predict any significant rise in house prices for the foreseeable future, so a delay in buying at this time is no bad thing," he says.

With the couple's cash-based savings currently standing at £26,800, Reilly recommends investing £20,000 in an appropriate portfolio. "This should be invested as tax-efficiently as possible, putting the maximum amount in a stocks and shares individual savings account," he says.

"Assuming they employ a 'compromise' strategy, I advise they split the £20,000, with approximately 60% in growth-type investments, such as global equities and international real estate investment trusts, and 40% in more defensive fixed-interest investments and cash."

This strategy would include a broad range of asset classes, spread through 40 countries, giving Dariusz and Malgorzata a diverse portfolio.

As they are new to investing, Reilly suggests a simple passive strategy using an investment platform. He recommends a wrap account, where all their assets can be viewed online and analysed on one platform. Such an account can also be easily managed and rebalanced annually to match risk tolerance.

"I would recommend that they hold both the non-ISA and ISA investments in the same funds, using an appropriate wrap platform. My preferred choice would be one from the oldest wrap provider in the UK – Transact," he says.

Reilly says that as the stockmarket could fall as well as rise, the couple will have to invest for the long term – a minimum of five years – to see any significant gains. So they should keep an easy-access cash cushion of about three months' pay – around £6,000 – to provide for the unexpected.

"Both Dariusz and Malgorzata are internet-savvy, so I would recommend a good instant access account that's accessible online. A decent account paying 2.8% interest is currently available through the AA's website, theaa.com," he adds.

Review your pension

Reilly stressed that the couple should also look at the fund selections of their pension plans, where their individual choices should reflect their personal attitudes to risk.

At present, only their employer is contributing to their pensions, and Reilly recommends leaving it this way for now, as their priority is to save for a house deposit.

"In the future, they may be able to afford to make lump-sum pension payments up to the value of their income in any given year," he says.

Now the couple have their baby son Oliver to consider, Reilly says they shouldn't ignore the issue of insurance: "They are relatively young and have good health records, so now is the best time to consider locking into probably the best rates they'll ever obtain for life insurance policies.

"Royal Liver, Aviva and Legal & General can all provide five times their joint salaries worth of life cover for less than £15 a month."

The couple should also consider income protection insurance. For around £20 a month, they could secure £10,000 a year of cover.

However, as they both work in the public sector, Reilly points out that they should have the first six months covered by their employee benefits.
He adds that the couple should also write a will to protect Oliver's interests should they both die.

Dariusz and Malgorzata found the makeover very helpful – it made them realise that they should invest their capital over the long term. It also highlighted the importance of life insurance now they have a young son.

"The adviser convinced me this is the right thing to do for my family, because anything could happen to me or my wife, and the last thing I want to happen is for Oliver to be left without any funds," Dariusz says.

How Dariusz and Malgorzata can reach their goals

ONE: Invest £20,000 in a tax-efficient portfolio
TWO: Leave a cash cushion of three months' salary in an AA Internet Extra account
THREE: Take out life insurance and income protection policies to protect their income and their young son should anything happen to either of them
FOUR: Write a will to protect their interests

Want a free makeover? Write to: Money Makeover, Moneywise Publishing, Standon House, 21 Mansell Street, London E1 8AA or email makeover@moneywise.co.uk

Your Comments

With savings of £26,800, I would have suggested that they see a mortgage adviser and start househunting!

Invest for the long term, a minimum of five years,that implies that after five years everything will be fine, in my experience this is rubbish advice,the truth is no one has a clue what will happen next week nevermind in 5, 10 or twenty years time, investing is for those people who can afford to lose money, my advice for the average person is ignore so called Financial Advisors and either spend the money or use the best interest rate you can get from a building society or bank