Legal eagle spreads financial wings

Simon Gilbert
Age: 25
Lives in: Newcastle upon Tyne
Occupation: Trainee solicitor
Earns: Under review
Mortgage: ?24,000
Debts: Graduate loan ?6,000, student loans ?3,500,
credit card ?800
Investments: ?1,000 in cash Isa
Pension: Member of company scheme
Aims: To buy another home and check his
pension payments

About to qualify as a solicitor, Simon Gilbert wants to make the most of a forthcoming pay rise.

He already has his foot on the property ladder, having bought a half share in a flat with an old school friend about two years ago. The timing was good. They paid £50,000, and it is now worth around £70,000.

Simon recently moved back with his parents, and is looking for another property to buy. To cover his mortgage payments, he has let his room in his old flat.

'It isn't that I have fallen out with my co-owner. I want to be nearer to Newcastle and that flat is 15 miles away from where I work.'

Simon had no trouble finding a tenant for his room, and his friend is happy with him sub-letting. 'If he wasn't I think I would consider buying him out so I could keep the flat as an investment,' says Simon.

He is now looking into a 'buy to let' mortgage so that when he buys another property, the rent from it would be taken into account.

His other commitments include repaying a graduate loan he took from his bank to buy a car. He is considering whether to increase this loan to add to his savings in a cash Isa for the deposit for his new property, or taking a 100 per cent graduate mortgage.

He has been a member of a money purchase pension scheme at work for the last two years. He pays 5 per cent of his salary into the scheme and his employer matches the contributions.

When he gets his salary increase, he wants to increase his contributions to 10 per cent straight away, although his bosses won't pay any more.

'I feel if I do this immediately, I won't miss the money because I won't have got used to having it,' he says. But he wonders whether the level of the extra contribution will be enough.

'I have heard so much in the news recently about people not saving enough for their retirement. So I am not at all sure whether I will get a decent pension on the basis of these contributions or not,' Simon says.

He has a £3,500 student loan which he started paying off at £25 per month about 18 months ago, plus £800 outstanding on a zero per cent credit card. He is paying the minimum of £25 a month off that.

He started with an Egg card, then switched to RBS Advanta. In February, when the interest-free period expires, he hopes to move again.

He has contemplated withdrawing £3,000 from his card to put towards the house deposit, but was worried that the offer might be withdrawn, landing him with a higher bill.

Adviser 1: Gordon Wilson

Simon has adopted a prudent approach to
managing his debts, and putting the funds to good
effect.

His property purchase has paid off handsomely to
date, and it is understandable that he wants a
similar investment. Simon is young enough to
invest in an additional property to live in and
retain his existing flat.

He may, however, wish to take note of recent
indications that the property market is slowing.
This makes 100 per cent mortgages more risky. If
prices fall, Simon could find he is in negative
equity. If the purchase is for the long term this
may not be much of a concern, but if it is bought
as an investment the risk is greater.

But Simon should diversify his investments. I
expect he is investing in shares through his
pension.

The contributions by himself and his employer are
reasonable for a 25 year old, but I am pleased
Simon is considering paying more when his
salary rises. He may find that total combined
contributions are limited to 17.5 per cent of his
gross income if the scheme is a group personal
pension. This will rise when he is 36.

If Simon has money over, he may want to
consider using his Isa allowance, and splitting his
free fund between topping up his mini cash Isa
and a mini equity Isa with another provider. He
should consider an international generalist,
open-ended investment company (OEIC) or
investment trust for this.

Gordon Wilson works for financial adviser
Thomson & Shepherd.

Adviser 2: Amanda Davidson

As a professional, Simon will be able to buy a
new property with a 100 per cent mortgage basis
and borrow up to four times income.

We recommend he seeks a variable rate without
penalty. As he owns a property with a friend, he
needs flexibility. The friend could have plans of
his own, which would force Simon to reconsider
his position.

So it would be useful for Simon to have a loan he
could repay in part without penalty. He also
needs to be aware that he is jointly and severally
liable for his previous loan, so he could face big
liabilities if there is a major interest rate
fluctuation, or his friend cannot meet the
repayments.

He should make sure when he takes out his new
mortgage that he is adequately covered if he
were to fall ill. A critical illness policy to cover the
loan and adequate health insurance would be
useful.

Simon's higher pension contributions should give
him an income of about ?21,000 a year if he
retires at 60. This is about two thirds of his current
salary.

That said, Simon would expect his salary
increases to be above average because of his
profession. So he needs to make sure he
continually increases the amount he puts in his
pension, and monitors it regularly to make sure it
is still on target.

In due course Simon should save money
elsewhere, perhaps in an Isa, as an emergency
fund.

Amanda Davidson works for financial adviser
Holden Meehan.

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