No debts - but no pension

Chris Snarski
Age 24
Lives in East Dulwich, south London
Occupation Technical support manager
Earns ?28,000 including bonuses
Mortgage None
Debts None
Investments Premium Bonds
Pension None
Aims To sort out a pension, invest savings on the
stock market and take out income protection
insurance

Chris works for a small company which provides technical support services to the oil industry. He gets on well with his boss and each year sits down with him to decide a bonus which reflects his contribution to the company's profits. But he does not have a pension and he feels he should be doing something about it. He is not sure whether a personal pension or a company-sponsored scheme is more suitable.

Chris has always felt the need to save. 'I did not go to university as most of my friends did and have always worried about being out of employment. So I wanted to build up my savings to give myself some security.' So far his main choice of savings vehicle has been Premium Bonds. Over the past five years he has built up the maximum holding of £20,000 in bonds and has purchased a further £2,000 in his mother's name. He generally wins something every other month. His biggest win was £1,000, though for the last two months he has not been so lucky. He likes Premium Bonds because of the gambling aspect, the chance to win £1m without losing his stake. The National Lottery does not appeal so much although he occasionally buys scratch cards.

He is living in rented accommodation which he shares with friends. His rent is £300 per month. He has no wish to buy a home at present. 'With renting, you have no hassle and no responsibilities. When you buy, it means you have to settle down,' he says. However, he admits he has talked with a friend about buying a property to let as an investment somewhere outside London. But so far they have got no further than talking.

He is considering what to do with around £5,000 he has in his current account. He normally likes to keep the balance at about £2,000. He is debating whether to take out an ISA. But he was recently deterred when he read an article about several people who had bought ISAs earlier this year and had not made any money. Yet he would like to put something into the stock market and has considered buying shares direct.

Another concern is income protection insurance. He had a cycling accident a couple of years ago which 'put his hip out', and he has been suffering back problems ever since. He is worried that this might eventually affect his ability to work and would like to know if he can take out insurance to protect himself against this possibility.

He has no debts, not even a credit card, as he says he was brought up to save first before spending. His car is provided by his company. He has been in his job for two and a half years and expects to stay there for another year or two at least.

However, there is a possibility that he may travel abroad.

Adviser 1: Sharon Linnard

Chris is right to start thinking about pensions
now. From next year his employer will have to
offer a stakeholder pension under which charges
will be very low and the contract very flexible.

Starting regular contributions when he is 25 could
mean that Chris needs to pay perhaps no more
than 10 or 11 per cent of his earnings to build up a
reasonable pension. He could use some of the
money in his current account to make a one-off
payment to a pension. Some insurance
companies already offer terms in line with the
stakeholder regime and because he can pay net
of basic rate tax, a payment of say ?2,000 would
be topped up to ?2,546 with tax relief.

However, Chris may pre fer to put some money
into an Isa. These are to be held for upwards of
five years, and the fact that those taken out
earlier this year have fallen in value should not
be a deterrent.

His relatively large holding in Premium Bonds is
understandable but, unless winnings are
re-invested, the capital is being eroded by
inflation.

Chris should ask an independent financial adviser
about income protection cover. As he has had
back problems, insurers might want a higher
premium or an exclusion.

There is a case for Chris buying his own property.
Rental accommodation can provide a good
income.

Sharon Linnard works for KPMG.

Adviser 2: Gordon Wilson

The benefit of joining a company pension
scheme is often undervalued. Although Chris's
company does not have a pension scheme, a
stakeholder scheme will have to be put in place
next year.

As Chris gets on well with his boss, he could
arrange in advance to give up part of his bonus
which could be redirected into his pension, so
reducing his personal tax bill. In addition, he
could contemplate contracting out of the State
Earnings Related Pension Scheme (Serps). This
will involve a redirection of an element of his NI
contributions to a pension in his name which
could lead to a larger second pension than that
available from the state.

I would not encourage anyone to pay everything
into Premium Bonds. Unless Chris wins some big
prizes there is a significant risk that his capital
will be eroded by inflation. He is also probably
suffering an appalling rate of interest in his
current account and should move his money
without delay. A cash mini Isa of up to ?3,000 is a
good option as interest is paid tax free and rates
of 6-7 per cent are available. It is true that some
people investing in share-based Isas this year will
have lost money. These should only be
considered as a medium or longer-term
investment but Chris should not enter into an
investment if he is uncomfortable with the risk.

Gordon Wilson works for independent financial
advisers Aitchison & Colegrave.

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