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 firstname.lastname@example.org
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).
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.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.