The Daily Telegraph - Saturday - Money
‘I’m out of work and in debt – can I afford a £100k pension?’
A stay-at-home dad wants to achieve financial security for his family, but it’s not going to be easy, reports Ron White
Jordan Chapman is moving into a new phase of his life. A few weeks ago, he was working as a forest school leader, where he was tasked with running programmes for children at a luxury camping resort. After eight months in the role, the 33-yearold has now left so his higher-earning fiancée, a community carer, can work more hours while he looks after their one-year-old daughter.
He is also in the process of setting up a charity to deliver bushcraft activities to disadvantaged people, including Armed Forces veterans, prison leavers and children in state care.
It’s a busy time, but he also wants to sort out his long-term finances now he has a growing family.
He says: “I just want financial security for me and my family. Since time immemorial, you’ve always needed money to do stuff. If you don’t have money, you’re incredibly restricted in what you can do. I’m looking at shortterm pain, long-term gain as it were.”
He has various savings accounts he is keen to grow. These include a Lifetime Isa or Lisa, which he used for the deposit on his home, but is now using to rebuild his savings, currently at just over £ 1,000. He also has £480 in a stocks-and-shares Isa with Moneybox, an app, which is topped up when he makes day-to-day purchases.
“It’s a round-up account so when you spend money, let’s say £5.50 on a steak, it’ll run it up to the nearest pound and add 50p into your stocks-and-shares account. At the end of the week it aggregates that money and invests it.” He has also dipped his toe in crowdfunding, and has very small sums invested across five businesses.
At £421, the mortgage on their Telford home accounts for around a quarter of their monthly income, so they have some flexibility in their budget.
But they also have significant debts from home renovations, including almost £ 2,200 on a loan for a combi boiler, at 8.3pc interest, and another £4,100 outstanding at 14.9pc from insulating their conservatory. The house also has a flat roof, and they owe just over £3,000 for work they had done to repair it – with the interest rate also sitting at 14.9pc.
The nature of Mr Chapman’s partner’s job can also make the family’s income difficult to predict. By the time he retires, Mr Chapman would like to see his Isa to reach six figures. For the next decade, however, his target is £10,000. He would also like to know whether he should focus on paying down the debt, or to keep adding money to his savings accounts.
Felix Milton
Chartered financial planner at Philip J Milton & Company
I am afraid to say Mr Chapman seems to have built up almost an unmanageable amount of debt. With no earnings of his own, it will be difficult to repay these.
In terms of the repayment, he should not be looking at saving anything right now and his focus should be on clearing the debts. If he does need to access funds in an emergency, he does have his credit card that could be used for this purpose. He should sell his stocks-and-shares Isa and use those funds to repay some of his largest outstanding debt, which has the joint- highest interest rate, as the earnings on his Isa are unlikely to amount to a sum greater than the 14.9pc he’s being charged.
He could also sell the Lifetime Isa, but that would mean he suffers the 25pc penalty on the funds, however, that may be worth it to stop the large amounts of interest accruing on the remaining debt. I would then encourage him to write to his lenders and explain his financial situation and ask to see if there is any way of freezing interest and charges while he works to repay these. As part of this, he will need to work out a budget and see accurately how much he can afford to repay each month. There are services from charities such as Christians Against Poverty and StepChange which can give debt advice and help him to do this at no cost.
He could also consider some form of employment to assist with the household income and debt repayment.
Unfortunately, saving at the moment should not be the priority and repaying the debts is of the utmost importance to his and his family’s future.
Andrew Tully
Technical services director at Nucleus Financial
Paying off high- cost debt can make sense, but Mr Chapman should check if there will be any early repayment charges. He should also consider paying off those with the highest interest rates rather than the largest amounts first. A couple of his debts come with interest rates of close to 15pc, so paying those off may well be a better initial option than saving as it’s not easy to achieve a 15pc investment return each year. It may also be possible to consolidate these debts into one cheaper loan.
His current Isa savings in total are around £1,500. To get those to £10,000 over 10 years, assuming an investment return of 4pc a year after charges, would need a saving of £50 a month.
However, if he continues to use a Lisa, the cost would only be around £40 a month. The Government adds in a 25pc bonus, up to a maximum saving of £4,000 a year, which is £10 a month in this situation, meaning a total of £50 a month would be invested for each £40 he saves. The Government bonus is the benefit of a Lisa. But beware – a penalty is applied if the funds are withdrawn for any reason other than deposit on your first home or once the individual is over 60. As he’s already used it for that, he now wouldn’t be able to withdraw until he’s 60.
The way the penalty works isn’t that fair. Say he saves £ 1,000, which together with the Government bonus means £1,250 is invested. If he took it out and a penalty is applied, this would be 25pc of the money withdrawn. If he took the whole £1,250 out, the 25pc penalty charge is £312.50, so he’d only get £937.50 in his hand. This means he loses some of his own savings and gets back less than he invested, ignoring any investment growth.
That’s why a Lisa is really only suitable if you want to use it to help buy your first home, or to save for retirement. If he thinks he will want to access the money before age 60, he should consider using a normal stocks and shares Isa instead.
Keeping up the £50-a-month level of saving for a further 20 years would give him a total pot of £40,000. So, to achieve £100,000 of savings would need a reasonable step up in payments at some point – to more than £200 a month for the additional 20 years, or more gradually as he can afford to save more. The Lisa bonus is also only added until age 50, so a different savings vehicle would be needed once you reach that age, for example a stocks and shares Isa or a pension.
If circumstances change and Mr Chapman or his partner start working for a company, a pension scheme may give a better outcome than saving through an Isa.
An employer has to offer to pay at least 3pc of salary into a pension for most people. That’s on top of the tax relief the individual would receive on their own contribution. Some employers may offer to pay more or match payments the employee makes.