Wealth Check: 'Going back to college has left me no pension'

Yvonne Lenartowicz is a 39-year-old fashion designer earning a salary of £35,000. She has just bought a one-bedroom flat by herself, at a cost of £162,000, in East Dulwich, London. She took out a mortgage with Cheltenham & Gloucester, with a fixed rate of 5.49 per cent for the next two years.

Yvonne Lenartowicz is a 39-year-old fashion designer earning a salary of £35,000. She has just bought a one-bedroom flat by herself, at a cost of £162,000, in East Dulwich, London. She took out a mortgage with Cheltenham & Gloucester, with a fixed rate of 5.49 per cent for the next two years.

Yvonne gave up work as a freelance pattern cutter to take a second degree in graphic design, but this left her with a student loan. She owes £10,000 to the Student Loan Company and is paying it back at £145 a month. She has no savings and would like to start a pension.

We asked Jonathan Fry at Jonathan Fry & Co, Paul Ilott at Bates Investment Services, and Justin Modray at Bestinvest Brokers for advice.

Case notes

Yvonne Lenartowicz, 39, fashion designer

Monthly salary: £35,000

Pension: None, but Yvonne would like to start saving in order to be able to enjoy a comfortable retirement.

Savings: None.

Property: Yvonne is the owner of a one-bedroom flat in London, which is worth about £162,000. She has a Cheltenham & Gloucester mortgage with a fixed rate of 5.49 per cent for two years.

Loans: She still owes £10,000 to the Student Loan Company and is paying this back at £145 a month. The interest rate on the loan is pegged to inflation.

Monthly outgoing: Yvonne says her spending each month totals around £1,500 - in addition to the £145 debt repayments, her mortgage costs several hundred pounds, with the rest going on bills and general spending.

DEBTS

Ilott says Yvonne's loan from the Student Loan Company offers a much lower rate of interest than a standard bank loan, so it's not worth her looking to transfer this debt to another lender.

As the interest rate you pay on a loan tends to be higher than the rate you can earn with savings, most people stand to gain more by paying off debts than by saving their money elsewhere. However, as a basic-rate taxpayer, Yvonne currently only needs a return of more than 3.25 per cent a year before tax from a savings account to beat the current 2.6 per cent interest rate she pays on her student loan. This is easily achievable. Alliance & Leicester's Online Saver account is a no-notice product that pays 5.35 per cent a year. If she feels more comfortable paying her loan off more quickly, Yvonne can make extra payments by cheque or debit card.

Modray thinks Yvonne should shop around for a better mortgage deal when her existing fixed rate comes to an end next year. Provided there is no penalty for switching, she should be able to find a lower rate. Portman Building Society offers a five-year fixed rate of 4.68 per cent, with no penalty for moving after the special offer ends.

PENSION AND INVESTMENTS

Fry recognises that Yvonne falls into what is becoming an increasingly common group in society - relatively well-paid individuals who don't have employer-sponsored pension schemes. The cost of providing for your own pension is significant.

For many people, contributing 10 to 20 per cent of their income is a daunting target, though this is what someone Yvonne's age should aim for. Fry advises that, on £35,000, with no previous pension contributions, Yvonne should invest 15 to 18 per cent of her income into a pension plan. That is a contribution of approximately £400 a month after basic-rate tax relief. A broadly based set of investments run by several managers would be suitable, Fry says. Yvonne could consider a personal or stakeholder pension with Norwich Union.

Modray agrees that Yvonne has much saving to do if she is to enjoy a comfortable retirement. If she were to contribute 10 per cent of her salary into a pension or other type of investment, she might expect retirement income of about 30 per cent of her salary at age 65. This should be Yvonne's minimum target.

As long as Yvonne pays off her mortgage by the time she retires, her property might be her single largest asset. Releasing value from the property at that time, by either downsizing or using a mortgage equity release scheme, might be a sensible option.

Ilott recommends that Yvonne saves towards her retirement by combining investments in a stakeholder pension with regular and lump-sum contributions to a tax-free individual savings account.

Unlike stakeholder pensions, ISAs don't benefit from immediate tax relief, but they grow tax free, and income and gains in future are not taxable either. If Yvonne invests in an ISA for retirement purposes, she'll get the advantage of tax relief on her eventual retirement income, rather than on her contributions during her working life.

She could invest as much as £7,000 each tax year into a maxi ISA. Unlike with stakeholder pensions, where money can't be cashed in until retirement, 100 per cent of the funds invested in ISAs are available at any time.Fry adds that Yvonne should invest the maximum possible into a mini cash ISA in the current tax year - £3,000. But she can't have a mini and a maxi ISA in the same year.

INSURANCE

Ilott suggests that Yvonne ask her employer how long she will continue to be paid in the event of an accident or long-term illness preventing her from working.

Depending on the answer, she could then consider enhancing these benefits by paying monthly premiums to buy an income-protection insurance policy.

For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk