Mind the gap in your finances

There was a time when a year out was the term used to describe the period, usually spent abroad, between school and university or university and a career. Not now. The expression 'career break' describes the activities of an increasingly older generations of workers who opt to take time out of the rat race to follow their dreams.

In November I will set off on my own career break - heading for Australia via India and South-east Asia. Being a cautious sort of a person I'm used to taking out travel insurance for an overseas jaunt, but as I have discovered, a longer break can require a complete overhaul of your personal finances.

According to the international development charity VSO, 60 per cent of people are put off taking a career break through worries about finances. Yet a little careful financial planning can not only save you a surprising amount of money but ensure your finances don't go to pieces in the long term.

Banking
You may have been with your bank since the year dot, but now could be the time to open an account elsewhere. If you are going to be overseas for some time it is unlikely that you'll use only traveller's cheques - you will want to use a debit card to withdraw cash, possibly on a regular basis.

Most banks and building societies charge a minimum of 2.75 per cent of the value of each cash withdrawal you make abroad, and similar for purchases. Charges such as these might not seem much on the occasional withdrawal, but can soon add up.

Nationwide is the only high street financial institution to offer fee-free banking abroad. According to the building society, somebody making two ATM withdrawals with a debit card and spending a total of £1,000 on six different purchases valued between £50 and £400 would be charged £79 by Halifax, £55.80 by NatWest and £36 by HSBC, LloydsTSB and Barclays.

The same sort of wisdom applies to choosing credit cards. You may be used to swapping credit cards to get the lowest interest rate, but if you are going to use your card overseas you should also check the foreign usage loading.

Some lenders apply these charges only outside the EU, while others will apply them wherever you use the card outside the UK.

Nationwide and Lombard Direct are the only two lenders whose cards have no foreign usage charges at all. The other good overseas deal comes from Liverpool Victoria banking services, which runs the Liverpool Victoria, Saga and Frizzell credit cards. It charges nothing for usage within the EU but 1 per cent worldwide.

Insurance
As I discovered, looking for a suitable travel insurance policy can be time consuming if you want to cut costs yet obtain comprehensive cover.

It is especially important to have adequate medical cover and at least £1million cover for personal liability if you're going to be spending time in the US, as healthcare and legal costs are notoriously high. But even in a far less expensive country, such as India, the cost of treating malaria, for example, could run into thousands of pounds, so don't scrimp on this.

You can save a lot of money on your insurance by opting out of baggage cover, which you may feel comfortable doing if you're not carrying much of value, but bear in mind that most travel insurance claims are for lost or damaged goods.

For a year's trip including the US, I found premiums for comprehensive cover ranged from just over £200 to almost £400.

The big-name companies often offered the worst deals. Columbus charged £350 for the year , whereas website Insure & Go had a very comprehensive policy for £240.

In the end I opted for student specialist STA's cover. Its policies, underwritten by Isis, are available to anyone under 65 and uniquely offer a payment-on-the-spot option so you don't have to wait until you get home to be reimbursed for any medical claims. Its standard policy, which includes £2m-worth of medical cover, £1m of personal liability and £1,000 for luggage theft, loss or damage, costs £275 for the year.

Pensions
Most companies offering career breaks or sabbaticals will stop pension contributions even if they allow you to continue as a member of the scheme.

Independent financial adviser Francis Klonowski says that those taking a break from work shouldn't be in a hurry to do anything. He advises that you first get a leaving statement as well as a transfer value from your pension trustees.

'After a few months of being away you need to start thinking about your longer-term plans,' he says. 'If you're intending to return to your current employer, you'll probably be better off staying in the scheme. If you're not intending to go back, you should investigate the possibility of transferring the fund to another scheme.'

Klonowski also recommends you get the pension assigned to your name, to avoid having to do everything through your com pany's trustees. 'While you're doing all this, keep it in the context of your overall financial planning. Think about you want in retirement and how to achieve that and think about this before you make any decisions to transfer as doing so could be detrimental to your overall retirement pot,' he says.

Tax
It's not often the Inland Revenue gives you anything to smile about, but if you leave full-time employment part way through the tax year you may be entitled to a repayment of tax.

'If you're paying tax overseas or even if you're not earning, it's very likely you will have overpaid income tax via PAYE in this country,' says Mike Warburton, tax specialist at Grant Thornton.

There are two ways to claim a rebate. If you usually send the Inland Revenue a tax return at the end of the tax year, you can reclaim any money owed this way. Alternatively, you can visit your local tax office and fill in form P50 to apply for the rebate.

Ann Gregory-Jones, head of tax at Hays Macintyre, says employees taking a career break should also check whether they are still entitled to any other benefits they are used to getting from their employer.

'If you're currently covered for permanent health insurance, private medical insurance or death in service, you need to consider whether you'll still be covered.'

Letting out your property
Taking a career break suggests you'll want to return to your property at some point, so selling it is probably a bit drastic. To keep the mortgage repayments covered, you'll probably want to consider letting it out.

'Letting won't be a problem, but your lender does need to be informed if you are going to be out of the country,' says Elliot Nathan, senior technical underwriter for the Marketplace at Bradford & Bingley.

Some lenders will switch you to a buy-to-let mortgage while you let out your property, but others will allow you to stay with the same deal, which will be cheaper, while you're away.

The most sensible way to let your property is to use a letting agent. Fees will typically be between 7 and 10 per cent of your rental income, but they are likely to be more stringent about tenant checks and will manage any problems while you're away.

In addition, 'property owners should still have enough savings to cover any repairs that may need doing or any rental voids in their absence', says Nathan.