Wealth check: The future can wait - get back into the black

A 33-year-old is concerned about pension provision, but an economic climate like this calls for shorter-term security measures, such as clearing debt.

(TONY BUCKINGHAM)

The patient

Jane Israel, 33, recently changed jobs, leaving her with a pension dilemma. While she was working as a self-employed driving instructor, she set up a stakeholder personal pension. However, since starting as a road safety officer for Suffolk County Council this summer, she has had access to a final salary pension scheme.

"I don't know whether to stop paying into my personal pension, or try to transfer this into the new scheme, which I know is very good," says Jane, who lives in Bury St Edmunds. "Given the current climate, and the need to do the right thing with my money, I want to make the best decision."

On a salary of £21,200 a year, she is paying £112 a month into the final salary scheme, as well as £40 a month into the stakeholder pension with Scottish Equitable.

"The transfer value of my personal pension is £3,900, so it hasn't performed well since I started investing seven years ago," she says. "But that might just be down to the current market conditions."

Another financial goal is wiping out debt. Jane is £1,500 overdrawn on her Halifax current account, for which she is being charged interest at 19.5 per cent, and she has £600 on a Halifax credit card at 15.9 per cent.

She also pays £136 a month for a £7,500 personal loan over five years with the Halifax, at a rate of 8.9 per cent. "This was taken out two years ago to buy a car," she explains.

In terms of financial reserves, she has £800 in a Halifax individual savings account (ISA) tracking the FTSE 100 index. "This has fallen by £200 since the original investment eight years ago," she says. "This is very disappointing and my lack of savings is worrying as my outgoings are too high to be out of work for any length of time."

Jane owns a one-bed flat in Brighton, bought for £172,000 in April 2006. Since she moved to Suffolk, she has been renting the property out for £775 a month. This doesn't quite stretch to cover the £800-a-month, £137,000 repayment mortgage fixed at 5.4 per cent for a further two and a half years with Northern Rock.

"Ideally, I'd like to keep the Brighton flat as an investment and save enough to buy another home in Suffolk," she says. Currently, she is renting a one-bed house in Bury St Edmunds for £625 a month.

Jane has no insurance policies in place. "I did have income protection when I was self-employed but cancelled this when got I got my present job."

The cure

Building up a pension pot is important, agree our panel of independent financial advisers (IFAs), but this should not be Jane's focus in volatile times. "Debt reduction is her first priority," says Colin Rothery from IFA Throgmorton Financial Services. "Once she has tackled this, she can turn to other aspects of planning for the future."

Retirement

In the present climate, Jane is fortunate to have access to a final salary scheme, says Darius McDermott from IFA Chelsea Financial Services.

She started paying into a pension at an early age, and as this part of her financial planning is being dealt with, she needn't worry too much about the finer detail now.

The current market conditions will be contributing to the stakeholder's poor performance and eventually returns should pick up. So rather than transferring the value in the fund to the final salary scheme, Jane could stop paying into it and redirect her contributions towards repaying debt.

"Normally I'd recommend making additional pension provision, but given Jane's debt, this isn't important at this stage," says Kelvin Lillywhite from IFA Albany Financial.

If at some point in the future she wants to switch the stakeholder money to the final salary plan, she should check the terms of the scheme, says Tom McPhail from IFA Hargreaves Lansdown. "If she is buying added years in the company fund, this might be an attractive option."

Final salary schemes are considered the most lucrative type of workplace pension. They pay a retirement income based on final salary and length of service, rather than being dependent on investment performance, as is the case with a stakeholder.

Debt

Until Jane is back in the black, any thoughts of investments and saving for another flat purchase should be put on hold, agree the advisers. "The outlook is gloomy, but an environment of falling interest rates will not greatly affect Jane as she doesn't have savings and her mortgage is fixed," says Mr McDermott. "But wiping out debt will help her ride out the recession."

She should devote as much of her disposable income as possible towards paying off her overdraft, as this is incurring the highest rate of interest. "Then she can look to clear her credit card," says Mr Lillywhite.

Savings/investments

Once Jane has wiped out her debt, she can consider expanding her investment portfolio.

With the stock market at a low, cashing in the Halifax ISA now would be a "last resort", argues Mr Rothery, as it would only crystallise her loss.

However, not all the advisers agree that she should leave this investment in place. "It's unlikely the fund is going to do anything spectacular in the next few years," says Mr McDermott, "so I suggest liquidating the tracker to help clear some of her debt."

Whichever route Jane decides to take, building a cash "emergency fund" of around three months' salary will be important when she is debt-free. Once this is achieved, she can dip her toe back into shares.

Property

The outlook for the housing market and interest rates over the coming years is uncertain. "But as it stands Jane has 20 per cent equity in her flat so is in a reasonable position at present," says Mr Rothery. "This may help her get another decent rate once her mortgage expires," says Mr Rothery.

Yet as Jane wishes to buy a property in Bury St Edmunds and prices are falling, she may be better off selling the Brighton flat and taking advantage of a tracker mortgage.

"Making the most of recent rate cuts would help ease some of the financial strain," says Mr McDermott. "But she may struggle to sell her flat at present."

Protection

In the event of long-term illness or job loss, Jane would be left financially exposed. While her employer would be likely to pay her full salary for a specific period, she should seek longer-term security by reinstating an income protection policy. She should look to take independent financial advice to see which insurance policy best suits her circumstances.

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Write to Julian Knight at The Independent on Sunday

191 Marsh Wall, London, E14 9RS j.knight@independent.co.uk