Carly Graham is a 26-year-old architectural designer living and working in London. She owns her own home and has been left a substantial inheritance in equities which she hopes to put to good use by founding her own architectural practice in the next year.
“My mother and grandmother died when I was young,” she says. “I inherited a number of shares and investments from them. The inheritance enabled me, when I finished my degree, to put down a deposit on a flat and secure a mortgage despite still being a postgraduate student.”
Graham is considering starting her own business. She currently juggles freelance design with part-time teaching at a university which earns her a combined annual salary of £33,000. Graham also receives £6,500 from annual share dividends and £14,000 in rent from her £300,000 home. “I rent out three bedrooms in my flat in London where I also live,” she says. “As I rent out to friends I don’t want to make a big profit and the idea is to just to break even.”
At the moment Graham feels her life is unpredictable. “I want to keep a lot of flexibility in my finances,” she says. “This is why I didn’t cash in more shares to put a larger deposit on the house and have a smaller mortgage [currently £152,000]. I was advised that shares were more easily liquifiable.”
Graham describes the spread of shares in her portfolio as “immensely unethical” and would like to move into green and ethical investment. “I know my grandparents’ generation worked very hard to accumulate this capital and I feel some pressure to manage it all better than I do currently,” she says.
Graham also hopes to start saving money and pay into a pension scheme.
James Norton, director at evolve Financial Planning, suggests Graham investigates joining the University Superannuation Scheme where she lectures. “It is hard to have firm ideas about when you would like to retire when you are 26,” he says. “But Graham is right to start thinking about it now. Pensions are an excellent method of saving for the long term. There will be no capital gains to pay within the funds, making it a more efficient savings tool.” Norton calculates that if Graham saved £150 a month into a pension scheme with 7 per cent growth and 1 per cent annual charges, she could hope to achieve an annual pension income of £15,000. The longer she waits, the more she will have to put aside.
Dan Dowding, certified financial planner at Killik & Co, says: “It’s not uncommon for self-employed individuals to neglect their long-term financial planning while focusing on their business requirements,” he says. “Of all the retirement options available to Graham perhaps the simplest is to take out a personal pension available from most financial providers such as banks and building societies.”
However Gordon Wilson, director at Clark Thomson Shepherd Investors, warns that Graham needs more discipline. Until she can quantify her exact living expenses, she will find it difficult to commit to a regular savings or pension plan. Wilson also questions the merit of Graham’s share spread and in favouring a variable rate mortgage over selling more shares. “Holding investments when you have debt is high risk,” he says. As is holding 90 per cent of her assets in FTSE shares. Although shares tend to outperform other assets over the long term, they can go through dramatic swings. He suggests holding equity assets in a fund rather than directly and considering an ethical fund to meet her criteria of green investment.
Norton says there are a number of low-cost tracker funds on the FTSE4Good index. “This is designed for investors who are looking to invest in companies that demonstrate a strong commitment to corporate responsibility,” he says.
The advisers say Graham should restructure her investments to reduce risk. This would involve reducing her exposure to equities and increasing the level of fixed income in her portfolio. Changing the structure of her portfolio could also come in handy when Graham creates her own business, says Dowding. If she wants to invest a large sum into her business then she may want to secure this by moving it to a less volatile asset class.
If she did start up her own practice, Dowding recommends she employs a good accountant. “It may seem like an expensive luxury at first glance but down the line a good accountant is likely to save her money and provide advice on the type of company she should form.”
Norton says Graham is entitled to £4,250 tax-free rental income each year under the government’s “Rent a Room” scheme. “She is fortunate in that she has inherited a considerable amount of investments,” he says. “What she must concentrate on now is reducing risk.”
Name has been changed.