’ve spent months doing research but still feel like I’m twisting in the wind,” Robert Dodsworth told Telegraph Money. The 38-year-old is one of millions across Britain in search of the holy trinity: pay off the mortgage, save for a pension and retire early.
A change in circumstances prompted Mr Dodsworth to look at his finances. “I recently left my job with a local authority to become a freelance photographer. Now I’m self-employed my income can vary.”
Entrepreneurs get to follow their dreams but inconsistent cash flow can make managing money more difficult. With two children, aged seven and three, Mr Dodsworth and his wife Tanya, 40, who works parttime, want a plan for the future.
He said: “I’m pretty confused with all the information out there on where to put my savings and how much I should squirrel away. I’m a fairly adventurous investor – I need to be since the pots I have are small – but equally I have children and am self-employed so need a balance.”
Mr Dodsworth’s debt is a £10,000 loan for home renovations and £4,000 on an interest-free credit card. The family home has a £144,000 repayment mortgage, which he overpays on occasion.
He asked: “Should I pay down my mortgage or am I better off investing any spare cash? I don’t know, though I’m 40 next year and would love to pay off my mortgage before I’m 60.”
When Mr Dodsworth left his public sector job he also walked away from its generous defined benefit pension scheme. He had accrued a pot worth £50,000, too little to support his retirement plans. “I’ve just opened a self-invested personal pension (Sipp) with £2,000, which I want to increase but I’m not Becoming self-employed puts additional onus on Mr Dodsworth to generate regular work and be fit to do it. He will have lost a number of local authority employee benefits: death in service, pension, holiday and sick pay.
So insurance must be a priority – before mortgage and retirement goals he needs to protect his family. They should complete a shortfall analysis to see how much life cover they need.
As Mr Dodsworth’s long-term goals rely on him working he should get income protection and critical illness cover, though income protection may be hard to get as a new freelancer.
A sensible saver, Mr Dodsworth is using tax-efficient pensions over the long-term alongside a shortterm rainy day fund. To be safe he should increase the latter to cover six months’ expenditure.
Paying down debt is good, although a mortgage is typically the cheapest form of borrowing and other debts should be repaid first. It could help to switch to an “offset” mortgage, when savings are put with the same lender as the mortgage and used to reduce the mortgage interest payable.
His mortgage is £144,000 and he has £47,000 in savings. An offset mortgage would charge interest on £97,000 instead of £144,000, allowing him to use the spare cash to increase his emergency savings, or invest. Mr Dodsworth has an interesting portfolio which has delivered terrific performance using some highly rated funds. Emphasis has been on looking for stellar performance and growth. My reservation is: what is in the portfolio to provide defensive cover? Failing to address this could be a costly mistake. Mr Dodsworth should consider some direct property, fixed income, infrastructure and possibly an absolute return fund. These assets
should provide a defensive buffer if the stock market falls further. Around 25-30pc in defensive assets would be worth considering.
At 30pc, his portfolio has too strong a tilt towards the UK and should be reduced to under 20pc; single digit exposure would be sufficient. His heavy Asian exposure should be rewarded in the long term, but this area tends to be volatile. He could trim this exposure and broaden it to include other emerging markets.