Financial Makeover: It's simple, yet subtle

NAME: JIM CHOI AGE: 34 OCCUPATION: FREELANCE WRITER
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Indy Lifestyle Online
In common with most us, Jim has a number of simple financial priorities: his pension arrangements, his mortgage, his investments, and how to protect himself, his partner Kristina, and the couple's young child, in the event of anything happening to him.

Where he differs slightly from some people is that he is self-employed. This places different priorities on how he plans his finances.

For instance, whereas someone with a regular job might already be a member of a company pension scheme, Jim must fend for himself. And while a employer might offer death-in-service benefits of up to four times income, and a proper sickness scheme, Jim will have to take out private cover if he wants to protect his income and his family.

What are his present financial arrangements? From an income of about pounds 18,000 last year, he puts away pounds 175 a month into a with-profits personal pension with Equitable Life.

He has few savings at present, beyond a business account with Portman Building Society into which he places the money he may need to pay off his annual tax bill.

As for the mortgage, Jim pays interest on the loan, while the endowment is in his partner's name. He has separate life cover for himself, which would pay off the mortgage if anything were to happen to him.

The adviser: Ian Millward, investment marketing manager at Chase De Vere, independent financial advisers, 2 Queen Square, Bath, BA1 2HD (01225 469 371).

The advice: Jim has enough life cover for the mortgage, but realistically he should aim to have at least an additional pounds 150,000 of cover to provide a lump sum for his partner and child, should he die. This shouldn't be too expensive. For example, on normal terms, Scottish Provident quotes a monthly premium of pounds 19.36 for pounds 150,000 cover on a 20-year term.

Permanent health insurance is also essential in Jim's position, as this will provide a regular income should he become unable to work for the long term. One way of reducing the cost is to opt for a longer period before the cover comes in. For example, if the deferment period is four weeks, the cost of cover with Friends Provident is pounds 36.45. Opting for a deferred period of 26 weeks cuts the cost to pounds 18.59.

Jim could also consider critical illness cover, which will pay out a lump sum on diagnosis of serious illness. This is becoming more popular these days, but can be expensive.

Another area Jim should consider is his mortgage. He currently has a variable rate mortgage with the Halifax at 6.95 per cent, backed by an endowment with Legal & General.

Endowments are often criticised, as they tend to be quite inflexible and expensive in the early years. But in his situation it is best to continue with the endowment and accept that it should deliver a reasonable lump sum at the end of the period. There are plenty of good mortgage offers around these days, but bearing in mind that Jim is self-employed and his income stream may not be as reliable as that of a paid employee, he does need an element of security.

Coventry Building Society is currently offering a five-year variable rate mortgage, capped at 5.75 per cent. If rates continue to fall Jim will benefit. The other beauty of this scheme is that it has no penalties after five years, and includes a free valuation, plus no arrangement fees or legal costs.

Looking at the rest of his finances, Jim seems to be in reasonable condition. He regularly puts money aside to pay his tax bill. He has done reasonably well on windfall and privatisation shares, holding a total portfolio worth approximately pounds 3,200. Whether he should continue holding these is another matter. It may be he should consider other options. If he is happy that he wants to be looking at stockmarket-based investment, a pooled vehicle, such as a unit trust, investment trust or OEIC may suit him better. Where possible, he should look to wrap this up in a tax-efficient shelter, such as a PEP or, after 5 April 1999, an ISA.

Finally, Jim needs to consider his pension. His existing scheme is with Equitable Life. In a with-profits fund, bonuses are added on a regular basis, so returns should be smooth and steady, unlike a unit-linked investment where the fund will move in line with the stockmarket. Generally, you would expect a unit-linked fund to deliver superior performance over the longer term and Jim has been considering moving some of his pension fund out of with-profits.

However, the Equitable Life with-profits fund has performed well, while some of its unit-linked management is not really as good. On this occasion, I would suggest that should continue investing his premiums in the with- profits fund.

Pension arrangements from his previous employment also need reviewing. He needs to consider whether it is worth transferring these either into his personal pension or another vehicle, and whether or not this will give a better return than just leaving them where they are. He needs to speak to an adviser who can offer a specialist service looking at, as any decision will need to take into account transfer penalties, the initial costs of transferring and the likely values in the future.

This can be done - at a cost. But it might be worthwhile, both in terms of helping him decide what to do, and also for peace of mind.

If you are interested in a free financial makeover, where an independent adviser will discuss your finances and offer solutions to your financial needs, write to: Andrew Verity, Free Makeover, `The Independent', One Canada Square, Canary Wharf, London E14 5DL. You must be prepared for your name and picture to appear in the paper

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