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Case Study: Starting work? Time to start saving By Nikki Watkins
Katie Donlan, 23, lives in Bromley in Kent with her parents. Since graduating, she has started working for a PR company in London, earning a salary of £20,000. She recently received a pay rise and quickly paid off the overdrafts and credit cards Katie pays rent of £125 a month to her parents and after further monthly outgoings - including running her car, train fare to work, socialising and shopping for clothes - she is left with a disposable income of about £650 a month. Katie has about £400 in a cash individual savings account (ISA) earning 5.25%, and a further £150 earning 5% in a web saver account, both with Halifax. "I want to set up a pension and get the most from my salary. I also want to start a savings plan for a deposit on a house," says Katie. "I want to set myself up well for the future and not waste the opportunity of my low rent while I'm still living at home." Jon Thompson, an independent financial adviser from Ashley Law in Bromley, agrees that Katie needs to use her disposable income wisely to maximise the benefits of living at home. He's impressed at how quickly Katie has paid off her student overdrafts and credit cards. Banking arrangements Thompson first turns his attention to Katie's main priority - utilising her income. Katie wants to review her banking arrangements. She currently has a student bank account with Halifax with a 0% overdraft facility of £500, which she no longer uses. Thompson recommends that Katie open a Premier Current account with Alliance & Leicester. "This offers an interest rate of 1.5% AER on balances up to £2,500, and provides the facility to invest up to £250 a month into the Premier Regular Saver account, which offers a fixed rate of 12% AER," he explains. This account has won the Moneywise Current Account of the Year award for the last two years. In the medium term, Katie is hoping to save for a deposit to buy a house with her boyfriend, while her short-term expenses include going to three expensive weddings this year and a holiday. Thompson advises her to continue saving into her Halifax cash ISA. "I recommend that she set up a regular payment of £250 a month to her ISA," he says. This is affordable to Katie at the moment, and it will utilise more of her £3,000 tax-free allowance for the 2006-07 tax year. Katie is also anticipating a £500 bonus from her employer before the end of the tax year in April, which Thompson advises she put in the ISA. "If these payments are maintained fully she can utilise next year's ISA allowance as well, without having to do anything more," he adds. Retirement plans Looking at Katie's future and her retirement planning, Thompson finds that she has a small preserved pension plan with Prudential from when she worked on a placement year during her university studies. Katie's current employer, however, does not offer a pension scheme, so she would like to set up her own. Thompson recommends that Katie look into taking out a stakeholder pension plan. "There are a number of advantages to this type of plan that will suit Katie's needs - her contributions will qualify for income tax relief at her highest marginal rate, a portion of the benefits on retirement can be taken as a tax free cash sum, and she can continue the pension should she change jobs in the future. Stakeholder pensions are regulated by The Pension Regulator [TPR] and are governed by their own set of rules." According to Thompson, Katie should start contributing to a stakeholder pension plan with Legal & General as soon as possible. "L&G is one of the leading financial services companies and biggest providers of index-tracking investments in the UK, managing around £137 billion," he says. He advises that she make a payment of £195 a month, which will fall to around £152 net with tax relief. Katie's attitude to risk is medium-to-high, taking into account her age and current financial circumstances. With this in mind, Thompson recommends that she make the contributions equally into the following funds offered by Legal & General under their stakeholder plan: 25% into the L&G property fund; 25% into the L&G Distribution fund; 25% into the L&G Ethical fund; and 25% into the JP Morgan Life Moderate fund. Hidden costs Thompson points out that Katie should watch out for hidden costs when transferring money. He says: "I'd recommend that at the present time she does not consider transferring her preserved pension benefits with Prudential into her new L&G pension, in view of the very high exit penalties." While Thompson's recommended pension contributions for Katie are quite high, considering her salary, they're affordable at the moment as her outgoings are low. He recommends that she review her contributions in April when she starts paying off her student loan. This is her only remaining debt, and Thompson says she should repay it in line with her earnings and not rush to clear it, as it's on a low rate of interest. Protection Next, Thompson looks at Katie's protection. She contributes £22.38 a month to a private medical insurance plan with Prudential through her employer. Katie says she only has the plan because it offers her a reduction in the cost of her gym membership. She has no provisions to cover her salary if she were to fall ill and be unable to work. "Katie's employers do not offer any benefits in this area - aside from statutory sick pay provisions - which initially amount to around just £200 per month," says Thompson. He advises Katie to look at putting some form of protection in place to cover her pay if she was unable to work, such as an income protection plan. However, she feels that this is not important while she is still living at home with her parents. "I think I will take most of Jon's advice," says Katie. "He made some really good suggestions and did quite a bit of research for me, which was very useful. He explained things so they were easy to understand." Jon Thompson is an independent financial advisor at Ashley Law in Bromley, Kent (ashleylaw.co.uk). Contact: 0208 777 7333
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