Better late than never

Kevin Weedon
Age 44
Lives in Nottingham
Occupation Trainer for retail group
Earns ?17,000
Mortgage None
Debts Credit card balance and store account
Investments Share save scheme and cash Isa
Pension Recently joined employer's scheme
Aims To buy a house and invest for retirement

Kevin realises that at 44 he has left it rather late to get his finances sorted, but he is now anxious to do so as fast as possible. He is particularly keen to buy a house and invest for his retirement.

On the home-buying front, however, he faces a potential problem. Not only must he save up for the deposit, but he is concerned that a debt that he is repaying may have an impact on his chances of obtaining a mortgage.

The debt saga started at the end of last year, when Kevin's credit card company claimed it had not received any repayments from him towards his £2,000 outstanding balance for the previous four months. Kevin says he thought minimum repayments were being made by direct debit from his bank account, but admits he had not been checking his bank statements.

Unfortunately, a letter that the credit card company sent warning him of the situation also went astray. In the end, the company passed his case to a credit recovery agency and Kevin is now paying off £150 a month as a result. At this rate, the debt will be cleared in full by next March.

At present, Kevin lives in rented accommodation, which costs £325 a month, but his aim is to buy a three-bedroom house. These properties are currently selling locally for about £50,000 and he hopes to have built up a 5-10 per cent deposit by next year in order to to make his purchase.

To save for this, he has set up a cash Isa with Nationwide to which he contributes £25 a month, plus any extra he has remaining in his current account at the end of the month. When he does eventually buy the property he is planning to take lodgers for the first couple of years to help out with the mortgage.

He also contributes to a share-save scheme through his company. This is due to mature in March next year. He estimates that, at current prices, the shares he will be able to purchase will be worth between £5,000 and £7,000. He wonders whether it would be better to use the money from the scheme towards his house purchase or retain the shares a bit longer. His current plans are to start another three-year share-save scheme when the first one finishes.

His other main concern is to build up his retirement savings. He has recently become a member of his employer's final salary scheme, to which he is contributing 5 per cent of his earnings.

Once he has cleared his credit card debt, he would like to save more towards his pension but he is wondering whether additional voluntary contributions (AVCs) or a stakeholder pension would be better. He says: 'What I have read about these schemes in the press so far has left me thoroughly confused.'

Adviser 1: Ray Boulger

Based on Kevin's current salary, and the fact that
this may increase by the time he is ready to buy a
property, mortgage affordability should not be a
problem. However, damage limitation on his
existing default is the most important factor.

He should pay off his credit card default as soon
as possible. The longer it has been paid off before
applying for a mortgage, the better chance he
stands of getting a decent rate.

If he doesn't have the cash to pay the default off
in full, he should consider diverting his Isa
savings and even use the cash he has saved to
pay off this debt. Once it has been repaid, he can
then concentrate on his other debt and, after that,
saving.

For advice on whether Kevin should sell the
shares from his share-save scheme or not, he
should approach a stockbroker or his bank. The
decision will partly depend on the share price.
However, it could be a useful way of generating a
house deposit.

It is easy to understand Kevin's confusion
regarding pensions, as there are many conflicting
comments on government initiatives and some
aspects of these new schemes have still to be
decided.

It is probable that he will be able to pay into a
stakeholder pension alongside a company
pension scheme. However Kevin should not worry
about which pension arrangement until next year,
when he'll have the information necessary to
make the choice.

• Ray Boulger is senior technical manager at John
Charcol.

Adviser 2: Dan Kemp

Kevin's key objective over the short term should
be to pay off his debts. There are mortgage
companies that specialise in lending to clients
with a poor credit history, but Kevin needs to
think carefully before dealing with such a lender
as he may pay far too much.

The best deals are with high street lenders, so
approach these first. It may be that they will look
favourably when the debt has been cleared.
When choosing a mortgage, I would recommend
that Kevin selects a fixed rate.

Although a discount rate or a product with a
cashback can look appealing, given the extra
expenditure he will have it is important that he
knows exactly how much his mortgage will cost
him each month. Once he has repaid his debts,
he should save at the start of each month. I would
suggest a system of two current accounts and one
savings account. The amount Kevin decides to
save should be transferred the day after he gets
paid. An amount to cover his bills should be
transferred to the second account. The money left
in the first current account he can spend over the
next month.

After he has purchased a property, his priority will
be a pension. Contributions to a stakeholder
pension will have the same tax advantages as
those to an AVC scheme. However, a stakeholder
pension can provide a tax-free cash lump sum as
well as a monthly income. The stakeholder
scheme is likely to provide him with greater
freedom.

• Dan Kemp works for Holden Meehan. Advice is for
guidance only.