Your Money Queries – 3rd June

Q. I have just completed my university studies and I am about to commence employment on a graduate training programme. I am living at home and will therefore have excess income. My parents have encouraged me to save into an ISA, but I know very little about them. Can you explain what is an ISA and whether this is a suitable savings vehicle, please?

A. Yes. An ISA is basically a tax-free scheme for saving, as returns from ISAs are free of UK income tax and capital gains tax. An investment must be made in cash and can be by way of a lump sum or regular monthly or annual savings.

You are able to invest in two components; either “stocks and shares” or “cash”. The maximum annual contribution limit for a cash ISA is £5,760, whereas the limit for a stocks and shares ISA is £11,520. However, if a cash ISA is taken the limit for a stocks and share ISA is reduced by an equivalent amount (meaning that, if the full cash ISA allowance is utilised, the stocks and shares ISA allowance would reduce to £5,760 also). The ISA limits are reviewed annually.

If you are starting out in your career, there are a number of issues that you ought to consider before committing your free cash to an ISA. For example, it is prudent to have some cash in an instant access “rainy day” account (often people suggest an amount equivalent to three months’ salary) and may be prudent to ensure that you have repaid any students debt that you may have. I recommend therefore that you seek advice from a chartered financial planner, who will consider all of your financial requirements, before proceeding with an investment such as an ISA.

Q. I am about to purchase my first home, together with my fiancée. Our mortgage lender is encouraging us to purchase income protection. What is this and is it necessary?

A. First, congratulations!

Income protection is intended to provide you with a replacement income in the event that you are unable to work for an extended period. With statutory sick pay restricted to £85.85 per week, for the first 28 weeks of incapacity, many people find that they cannot make ends meet in the event they are absent from work, for more that a few weeks, due to ill-health and therefore insure the additional risk privately.

It is worth nothing that ordinarily income protection is restricted to a maximum of 75% of your pre-disability income (less state benefits) in order to ensure that there is sufficient incentive for you to return to work. However, the amount of cover available varies and the amount you may require will depend upon a number of factors.

It is important to consider what, if any, sick pay you receive from your employer. Failure to consider workplace protection may result in you paying for unnecessary insurance or, even worse, having inadequate insurance in place (for example, if your employer pays two weeks’ sick pay, it may not be appropriate for you to take out income protection that does not commence until after you have been absent from work for 6 months).

You ought to consider your monthly outgoings and identify what costs you would have to meet in the event that you were absent from work. You ought to ensure that, in the event that you elect to take out income protection, it provides an adequate income for your needs but that it is not excessive. Insurers will consider your earnings when considering your application and will look for proof of consistent earnings. For example, if you have recently earned a particularly high bonus underwriters may seek to insure an income which is average over three years.

A further issue to consider is where you turn for advice in respect of income protection. If your mortgage provider has advised you in respect of income protection, have they considered all insurers, or just their own product or panel of insurers? I would encourage you to seek advice from an independent chartered financial planner, who will ensure that they consider all products and insurers appropriate for you (and not just their own products), thus ensuring that you obtain the most appropriate insurance at the most competitive price.

If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.

Rutherford Wilkinson Ltd is authorised and regulated by the Financial Conduct Authority.