Lucy Carr is a 24-year-old graduate living in London spending a high proportion of her annual £38,000 salary enjoying her lifestyle. Since she started work Carr has invested her yearly bonuses into various savings vehicles and is now interested in making these work harder.

Carr is unsure how much she should be putting aside towards her retirement and has no pension scheme. Her long-term savings goals are, she says, still uncertain. “I’m not sure whether it’s more important to be putting money into a pension or towards a deposit on a flat at some point in the future,” she says.

Carr’s savings total around £20,000 and are split between an Isa, savings bonds and an instant saver account paying interest of 5.25 per cent.

“I’d like to be able to make the money that I’m saving work harder,” she says. “Especially given that inflation is so high right now.” Carr says she is interested in investing in a broad range of sectors and is ready to start “playing” with some of her savings.

Mark Estcourt, managing director at Cavendish Young, the financial advisers, says most young people in their mid-twenties have the same dilemma that Carr faces of saving to get on the property ladder or paying into a pension because they invariably cannot afford to do both.

“Property has been so buoyant that it has put most starter homes out of reach of all but the high earners,” he says.

Including her bonus, which is typically 15 per cent of her total salary, Carr’s salary means she could afford to take on mortgage repayments. However she would struggle to fund the deposit, stamp duty and other associated fees, according to Estcourt. Saving up her annual bonus is one way to obtain money for these costs, but she would need to keep saving for another year or two before she had enough to purchase a decent property and not be too highly geared.

It could, says Estcourt, make more sense to wait and continue to rent. “In some instances, she would be better off renting and investing her cash elsewhere, as the costs of maintaining a loan now, especially with the likelihood of interest rates increasing, could be much less than any rent,” he says.

“Even if property only rises with inflation each year it will get harder and harder to get on the housing ladder,” says Marc Ruse, partner at Swallow Financial Planning. He recommends concentrating on this objective now and only considering further investments afterwards.

Ruse estimates that, as Carr currently pays £7,400 in rent, she could cover a £100,000 loan over 25 years or an interest-only loan of £140,000. However property prices in her area of London average £200,000 for a small flat. One option might be to buy with a friend, but the best option, says Ruse, is to save up for another few years first.

Apart from life cover provided by her employer, Carr has no form of insurance, but also has little debt beyond her £9,000 student loan which is charged at a low interest rate.

Estcourt says it doesn’t make sense to pay off this loan first. He recommends she keeps her capital saved up and continues paying the loan off every month. “If you are well paid, as she is, then it’s always much easier to service debt rather than trying to accumulate capital from your regular income,” says Estcourt. “As she has her bonus to fall back on, it would therefore make more sense for her to live off her income and continue saving the capital from her bonus.” This releases money towards pension saving.

“I would consider making single contributions of around half your gross bonus payment into a stakeholder pension scheme,” says Walker. In these schemes there is no set-up charge and annual fees are limited to 1.5 per cent. Carr’s contributions would incur tax relief at 40 per cent.

Estcourt says that many young people see their retirement as a long way off but that Carr should commit to paying a regular sum of money, either monthly or from her bonus, towards her pension. “The more you can put in at an earlier stage the less likely you are to have a problem at retirement,” he says.

If her employer has a contributory pension scheme, Ruse and Walker both recommends she joins it. In an ideal world the advisers would also like to see Carr investing in a pension and eventually accruing additional savings, including some for emergencies. Most advisers recommend saving three times’ monthly income as a starting point for this.

Carr already has almost £7,000 in a Halifax Isa and Estcourt says this is a good place for long-term saving. The growth of the sum invested is free from capital gains tax and income tax and can be accessed at any time.

Finally, Ruse suggests Carr might like to consider writing a simple will to clarify her wishes on death.

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