We help a reader who wants to get a good return on the stock market, despite her fears over the volatility Brexit may bring
Our money makeover candidate, who wishes to remain anonymous, is a 31-year-old from Wrexham, North Wales who works for the civil service.
She earns £28,000 a year and has no other sources of income. She has amassed the following in cash savings:
- £20,000 in a savings account
- £3,400 in a Help to Buy (H2B) Isa
- £500 in a regular saver
- £200 in a Cash Lifetime Isa (Lisa)
In addition, she pays in 6% of her salary into her workplace civil service defined contribution pension, while her employer adds around 20% on top.
Our reader, who currently rents, is keen to buy a house with her partner this year. She also wonders if she should start investing in stocks and shares in a bid to earn a higher return on her money. However, she is concerned that the uncertainty over Brexit could create stock market volatility. She has no debts and no financial dependants.
Danny Cox (left), a chartered financial planner at investment platform Hargreaves Lansdown, steps in to help. Mr Cox has over 27 years’ experience helping people to make the most of their money and has won numerous awards. His advice for our reader is as follows.
Check what size mortgage you’re eligible for
The amount our reader can borrow to buy a property will depend on her income and outgoings, as well as her partner’s, and the lender they select. The couple should use a mortgage broker, such as London & Country, to establish what is realistic.
They will also need to factor in all the potential costs of moving, such as a survey, legal costs, moving costs, and broadband connection. Likewise, immediate repairs, decoration, furniture and white goods may be required. If the property is worth less than £300,000, our reader won’t need to pay stamp duty as a first-time buyer.
Stocks and Shares Isas start from £25 a month
Moneywise says: During the Autumn Budget in November 2017, Chancellor Philip Hammond announced that stamp duty land tax would be abolished on homes under £300,000 for first-time buyers, with immediate effect. Meanwhile, London’s first-time buyers who are buying properties between £300,000 and £500,000 will not pay duty on the first £300,000. They will pay the normal rates of stamp duty on the amount above that. There is no relief for those buying properties over £500,000.
In an ideal world, our reader should reserve three months’ worth of expenditure in cash, rounded up to £5,000, to cover any emergencies. So, assuming moving costs are kept to £2,000, this would give her a deposit of £17,080 (£13,000 from her cash savings account, plus £4,080 from her Help to Buy Isa once you include the government’s 25% bonus), leaving £5,000 as a cash reserve.
Generally speaking, deposits of 10% or more attract better mortgage terms, so this might mean buying a property valued at £170,000 or using the Help to Buy equity loan scheme to increase the value of the deposit (Helptobuy.gov.uk/equity-loan/equity-loans).
Note that our reader’s Lisa can’t be used for her planned house purchase as she hasn’t held it for at least a year. She could cash this in without a penalty, as no bonus has been paid yet. Alternatively, she could hang on to it until the age of 60, adding to it over the years to boost her retirement. If she likes this idea, she would be better off transferring it to a Stocks and Shares Lisa. This is far more likely to provide better returns over the next 32 years – see the opposite page to find out more about investing for the long term.
Consider mortgage protection and wills
Once the couple have purchased their house, they need to ensure that should either of them die or suffer a major illness, their financial position can be maintained.
Our reader has death-in-service benefits of twice her salary. Her employer will also continue to pay her salary for a period, typically six months, if she’s unable to work due to an illness or accident. After this, her income could reduce to statutory sick pay.
On their own, these policies may not be enough to repay the mortgage in the event of death, so the couple should consider a joint mortgage protection policy where the death benefit reduces as the outstanding mortgage falls.
A mortgage broker or a price comparison website can be used to find a suitable policy. Non-smokers in good health can expect to pay around £8 a month.
An income protection policy, which pays a replacement income in the event of long-term illness, should also be investigated. A policy that would start to pay after our reader’s employer has stopped paying her salary would be around £15 a month.
The best cover is ‘own occupation’, meaning you can claim in the event that you are not able do your own job. The alternative is an ‘any occupation’ policy, which means that claims are not paid out if the insurer feels you could do another job.
Our reader must also ensure she has nominated a beneficiary in the event of her death, as so-called ‘common law’ spouses have no legal rights to death benefits under a pension scheme.
In addition, the couple should draw up wills to ensure their assets and belongings pass to their chosen beneficiaries on death. While the property may under some circumstances (joint tenancy as opposed to tenants in common) automatically pass to the survivor, possessions and other savings won’t normally do so.
Invest if you’re saving for the long term
The main reason to invest rather than hold cash is to try to beat the rate of inflation – the rate at which prices increase. Over the long term, the stock market has done a much better job at this than cash.
For these reasons, our money makeover recipient should consider dipping her toe into the stock market for longer-term savings through a Stocks and Shares Isa. These start from £25 a month.
Our reader also has some specific concerns about the impact of Brexit on investments.
Generally, good companies will make the best of any political and economic uncertainty and find a way to make a profit. Regular investing should also smooth out the ups and downs of the stock market.
Moneywise says: Check out Moneywise’s First 50 funds for beginner investors (Moneywise.co.uk/first-50-funds).
Continue saving into a workplace pension
This month’s money makeover recipient is in a very good defined contribution company pension scheme with a substantial employer contribution of about 20% of her salary.
As her financial priorities lie elsewhere for now, she should stick to her current level of funding.
Key recommendations for our money makeover:
- Speak to a mortgage broker
- Consider mortgage protection and wills
- Invest if you’re saving for the long term
- Continue saving into your workplace pension at your current rate
Lift your financial game by getting a Money Makeover
Are your finances in need of an overhaul? The Money Makeover is here to help transform the finances of Moneywise readers, one reader at a time.
We arrange a one-to-one meeting for you with an FCA-regulated independent financial adviser in your local area, who will discuss your financial concerns and goals for the future and draw up a bespoke financial plan for you. From the basics of shedding debts, budgeting and saving, to pension saving, building an investment portfolio and inheritance tax planning, our network of IFAs are qualified to provide strategic advice and specific product recommendations for all areas of financial planning.
You will receive a copy of the adviser’s report and it is completely your choice whether to follow through with their advice. The Money Makeover is totally free – all we ask is that you are comfortable for your personal financial details and photo to be published in Moneywise so our readers can also learn from the advice you receive.
To apply for your makeover, fill in the form at Moneywise.co.uk/money-makeover or email editor@moneywise.co.uk.
None of the above should be regarded as advice. It is general information based on a financial report conducted by Danny Cox of Hargreaves Lansdown in London
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