Natalie Brookes is a 25-year-old Australian/British national who is distinct for her age, not only because she is buying her own home but because she takes pension planning seriously.
The financial assistant has just started paying into a personal pension plan and has set her sights on retiring at 55 with a pot of at least £500,000.
“I don’t want to get to old age and have to worry about not having enough money,” says Natalie, who is currently renting a property in London.
However, Natalie, who earns £24,700 a year, is concerned that she might be overdoing it on the savings. After all her monthly outgoings, she has about £200 a month left over and wonders how she should best be using this cash: to pay off debt or to save?
She owns a property in Australia which has an A$210,000 (£90,000) mortgage and from which she receives rental income. She also has £7,000 in debts in the UK and little in the way of savings for an emergency.
One of the first things our advisers say Natalie needs to do is establish her
tax domicile as this will have a significant effect on her financial affairs.
Murray Payne of Global Destiny says that even though Natalie has dual citizenship she should not assume she is tax domiciled in the UK. “As Natalie arrived from Australia, her country of birth, approximately four years ago and intends to remain in the UK for several years more before returning, she can be said to be resident and ordinarily resident in the UK,” says Payne.
“However this does not necessarily mean she is domiciled in England and Wales. As it is her clear intention to return to her country of birth, it can be argued that she is domiciled within Australia.”
Linda Redknap of Grant Thornton agrees that her domicile status is likely to have a significant impact on her tax affairs.
“If you are not UK domiciled, any rental income you receive from the house in Australia can only be subject to UK income tax, and is only reportable to the authorities here, if you remit it to this country,” says Redknap.
“At the present time, it seems unlikely that you would do so, since the income is needed in Australia to meet the mortgage costs. Your rental income may be taxable in Australia, although you may be able to claim a deduction for ‘attributable’ expenses associated with the house, such as mortgage interest.”
Payne believes that her mortgage expenditure is tax deductible in Australia so there is no need for Natalie to reduce the mortgage quickly. She should instead focus on repaying her personal loan in the UK.
Stuart Davies of Deloitte says Natalie’s ability to pay off her mortgage is being hampered by the very high interest rate (14.9 per cent) on her £5,900 personal loan and says she should look to switch to a cheaper deal.
Davies is also concerned that Natalie might have underestimated her tax and National Insurance contributions, meaning she has less spare cash than she thought. “Natalie currently thinks her tax liability is about £5,200 per annum, but in actual fact after both income tax and National Insurance contributions her tax liability is more likely to about £6,290,” says Davies.
“This substantially reduces the level of disposable income that Natalie has available, from £200 down to just over £100 per month.”
Redknap, who also believes Natalie may have undershot her tax liabilities, should put her surplus monthly cash into an easy access deposit account. “If you are able to maintain these savings for a year without having to draw on them it may be an appropriate time to consider clearing the personal loan while retaining a modest emergency fund,” she says.
Natalie, who has just started putting aside £62 per month, or 3 per cent of her gross income, in her personal pension was also advised to be more realistic about her retirement goals. She wants to retire in 30 years with £500,000, but this was thought to be unrealistic at current savings levels.
Redknap estimates she needs to save a whopping £850 per month, net of basic rate tax, to reach her goal. “Accordingly you will need to consider making increases to contributions (when the law allows this in April) on a regular basis, as soon as cash flow permits,” says Redknap.
Davies reckons that if Natalie has managed to clear both her loan and mortgage in five to six years’ time, then she will have about £6,600 to invest elsewhere. “At this time she can start to increase her pension contributions, build up her emergency funds and, depending on her requirements at that time, save for other purposes,” says Davies.
Natalie was given the thumbs up for saving into a UK personal pension as her benefits could be transferred to an Australian “Super” or pension fund if she returned there. Because of her dual citizenship and assets in two countries, Natalie was advised to make a will in Australia and the UK.