Akwasi’s Financial Q&A
Financial advice from Akwasi Duodu (akwasi@sterlingandlaw.com)
Q: My bank has been on my case to set up a regular, monthly stocks-and-shares ISA. Should I shop around for a better deal, or should I just take the plunge and do my ISA with them?
A: Shopping around for a better deal can be a mug’s game, especially with something as complex as stocks-and-shares ISAs, which would normally require advice about your investment strategy, approach to investment risk, term of investment and contribution amounts. To compound the problem, you won’t find lists of stocks-and-shares ISAs on price-comparison websites. Shopping around yourself may indeed lead to confusion, and you could end up doing nothing as a result. If you want something quick and easy, take the plunge and do it with your bank. If, however, you are a discerning investor who wants to maximize capital-growth potential, speak to your independent financial adviser (IFA), who will have all the tools to do the shopping around on your behalf. Your IFA should also be able to help you choose your investment strategy in accordance with your attitude to investment risk. It is also important to review the plan regularly, so make sure you discuss this with your adviser.
Q: My fixed-rate mortgage deal has come to an end, and I am now on the standard variable rate. My monthly repayments are much lower than before. Should I stay on the standard variable rate, or should I switch to another fixed-rate deal?
A: Interest rates are at historically low levels, and the general consensus is that interest rates are likely to start going up again in 2010 – especially if improvements in the economy continue. However, the best fixed-rate deals around at the moment are highly “equity dependent”, meaning only those with equity of 30% or more in their property are likely to qualify for the best mortgage deals. If you have a lot of equity in your property, going on to a fixed rate now could be a masterstroke with fixed-rate deals of less than 3% being available. If, however, you don’t have much equity in your property, it may be better to stay on the standard variable rate and use what you are saving on a monthly basis to reduce your mortgage.
Q: My new employer operates a group pension scheme, and I am eligible to join it straightaway. They will match my contribution of 5% of my salary. I don’t intend to stay there very long; should I join the scheme, or is it not worth bothering?
A: Join the pension scheme. Many people envisage that they will not stay with an employer very long, only to end up being there for 10 years! If that happened in your case, you would be very pleased to have made the decision to join the pension scheme. If indeed you do leave your employer, say, within two years of service, you will have the option of transferring the value of your pension fund to a new pension plan of your choosing, such as your own personal pension plan or to a new employer’s pension scheme. You also have the choice of a refund of your contributions. The drawback here is that the refund is taxable and only pays your own personal contributions back to you. You will lose your employer’s contributions if you opt for a refund. Either way, the choice is clear. Join the pension scheme. You have nothing to lose.
Q: I have had a recent promotion, meaning that I am now in a position to start saving on a regular basis. However, I still have a number of credit-card debts and personal loans outstanding, totalling about £15,000. Should I pay off my debts or start saving for the future?
A: Pay off your debts. Saving money while in debt is a little like building a castle on the sand. The whopping debit interest rates you’ll be paying on your credit cards and loans will negate any credit interest gains you make on your savings. It is therefore better to direct your resources towards your debts. A variation on this theme would be to put some money aside into a separate account, waiting for this to build up to a significant value and then using this sum to make bulk payments to reduce your debts in larger chunks. It’s more fun. Once you have cleared your debts or reduced them to a manageable small amount, you can then consider short-, medium- and long-term strategies to save for the future.
Q: I have recently been blessed with a baby boy. Are there any insurances I should be considering as a single mum?
A: Yes. As a start, I would suggest some life insurance written under trust to your son. Then write a will. This will ensure that, in the unfortunate event of something happening to you, you would have left your son with the financial head-start in life we all wish we had, together with details of your wishes, such as who would be his legal guardian. This is extremely important and should be arranged as a matter of priority. If affordable, I would also suggest a long-term savings plan for your son be set up before he starts walking. Speak to your IFA, who should be in a position to advise you on the best way forward with regard to how much cover you’ll need, the best savings plans out there and getting your will sorted once and for all.
