Samantha Smith, a community development worker, spends her days travelling around the country lanes of Lincolnshire. She gives advice to managers of local village halls on how to make the best use of their buildings.
However, right now, Samantha, 37, a single mum from Sleaford, reckons that she could do with some advice on her finances. She says: “I am particularly interested in finding out about saving for my son Adam’s future. He is 12 and wants to go to university, so I need to be making provision for that.
“A number of my work colleagues have children at university and I know that it’s going to be very expensive, with tuition fees, board and lodging, the cost of books and so on.” Samantha wants to know roughly how much she is going to have to pay out a year while Adam is a student and how best she should save to fund that sum. She is starting pretty much from scratch and has only six years to go.
She also needs to start saving properly into a pension. “My employer, a charity, does have a pension scheme, but I have not joined it since I started work there two and a half years ago. In my previous job I was saving £130 a month into a pension and I know that I should be putting money aside now for my retirement, but I don’t know how much or what is the best way to save.
“Should I join my employer’s scheme, should I go for a personal pension or should I try a combination of both?”
Advertisement
She adds: “It is quite difficult to save anything on my salary of £21,500 a year. After tax and national insurance I normally take home about £1,500 a month, and even though I don’t live a life of wild extravagance, there’s not much left at the end of the month.”
At the moment Samantha has £1,800 tucked away in an Alliance & Leicester Premier current account, which was paying an interest rate of about 5 per cent until recently. She says: “The rate has changed so I am not getting nearly as much now and I wonder whether the account is still a good home for my savings. It is also quite a complicated account because you have to put a minimum of £500 in every month.
“ I am currently transferring money every month from my current account with smile [the internet bank], but I wonder if this is still worth it or are there better places for my savings?”
As well as saving into a Premier account, Samantha is putting aside £50 a month. “I think of it as my ‘rainy day’ money; it’s more for emergencies than savings.”
She has no stock market-type investments and is fairly risk-averse at the moment. “I may have to find some money unexpectedly to pay for some repairs to the car or the house, so I prefer not to have too much tied up in long-term investments. However, I am open to persuasion. I understand that, in theory, stock markets should produce a better result than savings accounts, and I am interested in ethical investment.”
Advertisement
Samantha’s main recreational activities are the gym (£26 membership a month) and horse riding with Adam. “I would be very reluctant to give up either of those things but, at a pinch, I suppose that I could give up my gym membership and do lots more walking. I can’t, however, give up my car as I need it for work.”
She lives with Adam in a modern two-bedroom, semi-detached house, worth an estimated £114,000. She has a repayment mortgage of £84,850 with Abbey and is currently on a three-year fixed rate of 4.59 per cent, on which she is paying £480 a month.
Although Samantha has remortgaged only recently she says that she would certainly be interested in any ways of cutting her home loan repayments. “I’m trying to make my money go farther by getting the best deal that I can on everything.”
What the experts say
Overall view: Dennis Hall, Yellowtail Financial Planning
Advertisement
“Samantha’s biggest concern is the cost of university education for her son. Rather than scrimping and scraping to save money toward this, the biggest help that Samantha can give is to teach her son how to budget properly.
“If he was attending university this year, then based on her circumstances he could receive a tuition fees loan of £3,225, a further student loan of about £2,900 for maintenance, and a further maintenance grant of about £3,500. Additionally, the university would provide a bursary; average annual payments for full fee-paying students are at least £321 and the average is about £1,000.
“After tuition fees, another large fixed cost is accommodation, estimated to work out at £2,215 each year. This leaves about £430 a month for books, food, entertainment, travel and so on. It’s not a fortune, but with some paid work in the holidays, the burden on Samantha could be smaller than she is anticipating.
“This is a good thing because Samantha has her retirement to consider. There is no guarantee that much state provision will survive until her retirement and so she shouldn’t be complacent about making her own provision.
“With at least 30 years before the basic state pension becomes payable, her retirement savings should include riskier investments such as shares.”
Advertisement
Action plan
Teach her son to budget
Start saving for her retirement with some equity investments
Pensions: Danny Cox, Hargreaves Lansdown
“Samantha should almost certainly join her employer’s pension scheme at the earliest opportunity. That way she will benefit from contributions from her employer.
Advertisement
“Ignoring her current pension savings to date, to provide a pension in today’s terms of £10,000 a year at age 65, Samantha would need to start saving £430 a month This amount is unlikely to be affordable. However, if she were to save the £130 a month that she used to invest in a pension, and her employer were to match this, at 65 her pension pot could be worth about £284,000, providing a pension of £6,000 a year in today’s terms. The net cost to Samantha would be £104 a month after tax relief.
“Few people can afford to save as much into a pension as they need to in the early years. Once children have left home and mortgages are cleared retirement savings can increase. Samantha should save what she can afford to now into a pension and try to increase this when she can.”
Action plan
Join employer’s pension scheme
Increase contributions over time
Ethical investments: Robin Keyte, Towers of Taunton
“After Samantha’s mortgage of £480 a month and other expenses there is not much left over. Her smile online bank account is part of the Co-operative, an ethical bank. I suggest moving her existing cash savings and future payments of £50 a month into a cash Isa to benefit from tax-free interest. In the current tax year Samantha can put up to £3,600 into a cash Isa (rising to £5,100 a year from April 6, 2010). Once the cash emergency fund is at a reasonable level, the monthly savings can be directed towards provision for university costs for Adam.
“Triodos Bank and Ecology Building Society are both offering 1 per cent on their ethical cash Isas (Triodos with a 33-day notice period). Student loans should cover Adam’s tuition fees and rent. That leaves costs relating to books, travel, food, etc (about £2,500 a year in today’s terms).
“With an investment term of between six and ten years I would suggest putting money in the Henderson Global Care Managed fund. This is a well-rated, medium-risk ethical equity fund, which will accept investments from only £25 a month.”
Action plan
Boost cash savings through an ethical deposit account
Put long-term savings into an ethical equity fund
Mortgages: Melanie Bien, Savills Private Finance
“Samantha would need to make considerable savings on the monthly interest payments to cover the redemption penalty plus any arrangement fee that the new lender charges. As she is already on a very competitive rate at 4.59 per cent, she is going to struggle to do this. She would need to achieve a rate of about 3.11 per cent to justify switching and to cover all the costs, but there is nothing available at this level. Another option is to switch to interest-only, when she could save £159 a month. However, she would need to find some way of clearing the loan by the end of the term.”
Action plan
Stick with the current mortgage
Samantha’s response
Wow. There’s a lot to think about here. Overall, the advice has been positive and has given me inspiration to reassess my situation further.
My son Adam is already aware that we budget so that we can afford to do fun things as a family. However, as he gets older I will teach him about budgeting.
It’s reassuring that loans and grants may help him through university, although I am wary of him leaving with too much debt.
I will certainly consider the company pension; however, I still feel that I need further advice about my pensions. As Mr Hall and Mr Keyte [see experts below] have suggested, it will be worth considering future long-term investments, such as an equity investment or managed fund.
I did have an Isa in 2007 but moved my money last year to a current account with a more favourable rate. I am cautious about where to put my money and I save as much as I can afford, particularly as I generally need instant access to savings.
Would you like a financial makeover?
Write to Money, The Times, Times House, 1 Pennington Street, London E98 1TB, marking your envelope Money MoT, or e-mail moneymot@thetimes.co.uk. Please include current finances, short and long-term goals and a daytime telephone number. You must be prepared to disclose your income and be photographed.