Money Makeover


20th October 2016

As featured in
The Telegraph

Money Makeover:

Like most parents, Jo Bishop wants to be financially comfortable without compromising the amount of time she spends with her children.

Ms Bishop, 47, currently works as a school administrator in Leicestershire. Her day usually finishes at 2.30pm, which allows her to spend her afternoons with her two daughters, Susie, nine, and Evie, seven.

Before the girls were born Ms Bishop earned £45,000 working full time as an accountant for the local government. Now her salary is just £8,200.

Until August Ms Bishop's income was supplemented by £900-a-month in tax credits and Child Benefit.

But since she moved in with her partner in their jointly-owned home she is no longer entitled to the benefits.

The couple bought the property for £135,000, mortgage free, but Ms Bishop still owes her partner £55,000 in order to have an equal share.

She has £73,000 saved in a Santander 123 current account, £4,000 in an Isa and £85,000 with First Direct, which earns no interest. She also has £4,000 in shares.

Ms Bishop knows her current financial situation will eventually begin to eat into her savings and believes an extra £600 a month will be sufficient. A better-paid job is an option, but that would mean more time away from her children.

Ms Bishop is considering investing in buy-to-let. She has seen a two-bedroom terrace house for £130,000 that she could buy with a small mortgage.

Ms Bishop is currently contributing 6pc to her pension.

She also has a final salary pension that will pay £16,000 a year when she reaches the age of 67.

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'How can I use my £162k savings to spare me from full-time work?'

How can I use my savings to spare me from full time work? Jo Bishop wants to earn an extra £600 a month without spending more time away from home

Jonothan McColgan, director of Combined Financial Strategies and chartered financial planner, said:

I'm sorry that Ms Bishop has been caught by a strange and cruel quirk of the benefit system that means the decision to live with her new partner has cost her £900 each month in benefits.

Moving in together has left Ms Bishop owing her partner £55,000 on the property purchase on top of the benefits loss.

After deducting the money owed to her partner, Ms Bishop has savings of £111,000, which she needs to generate £600 per month.

On face value this would mean she would need an income of approximately 6.5pc net. This is going to be almost impossible to achieve in today's climate.

The unusual thing about Ms Bishop's situation is she is expecting a final salary pension, from when she worked in local government, to provide £16,000 per annum from age 67.

If she qualifies for the full state pension she may also be entitled to a further £8,000 each year at the same age. So from age 67 Ms Bishop's income will massively increase.

It would seem Ms Bishop's main goal should be how to make her money last between now and then.

Buy-to-let suffers the same risk as any other investment and Ms Bishop's financial situation makes her particularly vulnerable.

The interest rate rises on the mortgage will eat into her profit, and there may be months where the property is empty and costs will still need to be covered. There is also always the risk of bad tenants.

Is investing in buy-to-let risky?Ms Bishop is considering investing in buy-to-let but the experts think this is risky in her position

 

I would suggest she invests from a position of financial strength with sufficient savings to meet any income shortfalls for at least five years.

She could keep £36,000 of her £111,000 savings in a bank or building society and draw the £600 needed each month for the next five years.

The advantage of doing this is that it will give five years for any investments to hopefully grow before having to provide her with income.

In doing this, Ms Bishop would be left with £75,000 to invest today that she could start to draw £600 per month from in five years time.

If the money was to last until age 67, Ms Bishop would need to earn a return of 4.14pc not taking into account increases in inflation.

It is possible for Ms Bishop to use her savings to help get her get to age 67 at current spending levels but she would need to be happy with taking what we would call a "balanced" attitude to risk.

The types of funds that would work well for Ms Bishop would be the Schroder Multi Manager Diversity or Jupiter Merlin Balanced funds. These cost a bit more than other funds but provide diversification.

If cost is a concern, Ms Bishop could consider a fund like the Vanguard Lifestyle Strategy 60pc Equity.

Vanguard keeps costs very low by using what are called exchange-traded funds or tracker funds, which track the index rather than being "actively managed". This means there is very little chance for any outperformance - investments purely replicate the stock market indices they invest in.

If Ms Bishop does not want to take the gamble there is no harm in waiting for a year or two so that she has a clearer picture of her financial future.

In the short to medium term, I think the easiest way to improve Ms Bishop's finances is to take the pressure off her savings by working more hours to earn more.

In reality it is unlikely that her children will need her as much once they are a little older.