Financial Makeover: The Commons touch

Huw and Cheryl have a joint income of pounds 33,450 gross a year, about pounds 2,000 net per month. Their outgoings run at approximately pounds 1,500 per month, leaving them pounds 500 per month available for positive financial planning.

They have no savings at present and Cheryl has a student loan of pounds 3,600 to repay. She is not required to start repaying this until April 1999. There is also a small loan from Cheryl's father, which needs to be repaid.

The adviser: Martha Catterall, director at City Independent, independent financial advisers, 35 Paul Street, London EC2A 4UQ (0171 528 0092)

The advice: My first piece of advice would be for Huw and Cheryl to set up a direct debit of pounds 200 per month into a Standard Life Instant Access account, which pays a rate of 7.35 per cent gross on a balance between pounds 1 and pounds 4,999, to repay Cheryl's student loan. This will allow Cheryl to get a head start in repaying her loan so that by April she will have already built up a lump sum of pounds 1,200 plus interest, to throw at the debt.

In addition, the couple should set up another monthly direct debit of pounds 100 per month into the aforementioned Standard Life debt account and every six months pay Cheryl's father a lump sum of pounds 600.

It always pays to look at who is providing the best rates: Prudential has recently announced that it's new telephone subsidiary, Egg, will pay 8 per cent gross on balances from pounds 1, although it is not yet clear how long the Pru will keep this price advantage.

Huw and Cheryl also need to create an "emergency fund" of pounds 1,500 to deal with unforeseen circumstances without having to rely on credit cards. Once the pounds 1,500 has been created, it can be topped up whenever it gets depleted.

Having such an account gives you a feeling of security too. They should set up a third direct debit for pounds 100 per month into a different Standard Life account. Standard Life will allow savers to have a variety of accounts under one main umbrella. The total balance is used to determine the interest rate.

The couple have a mortgage of pounds 42,525 with the Halifax, at a capped rate of 6.8 per cent until August 2002 and is repaid using a PEP. You elected to repay the loan over a 10-year period, and pounds 280 per month goes into a Halifax Tax Free Homeplan.

This combines a PEP with life cover and critical illness cover. If they die or are diagnosed with a critical illness, the mortgage is paid off but they forfeit the accrued PEP value. Of the pounds 228 per month, pounds 131.86 per month each goes into two separate PEPs. with pounds 16.62 per month paying for the decreasing term and critical illness cover on a joint life basis.

Huw and Cheryl are concerned that the performance of the Halifax Accumulation fund is poor, as has been reflected in a recent survey they have read. I must admit that the Halifax PEP funds are not on my list of recommended PEP funds. Indeed, the Halifax Accumulation fund, which has only been going just over a year, ranks 107 out of 144 according to Standard & Poor's Micropal information quoted in this month's. What Investment? magazine.

To invest in a fund with only one year's experience is not advisable in my view, instead I would recommend a company with a proven track record.

The couple could stop their direct debit to the Halifax PEP and then transfer the accrued balance into a new PEP with a new PEP provider. Once this has been done they could then reactivate the monthly direct debit with the new PEP provider. Fidelity provides overall value for money, with competitive charges, a good selection of funds and excellent historical performance.

The pounds 16.62 per month cost of protection with the Halifax is expensive: Scottish Provident will provide the same cover with superior critical illness cover for only pounds 10.47 per month.

Both Huw and Cheryl have some death in service benefit from their employers and the mortgage will be paid off if either of them were to die. As they are both young, and do not have any financial dependents, I see no reason to invest in any additional life insurance. As and when they start a family, life cover then becomes an important issue.

Critical illness on the other hand is relevant and important now. They are far more likely to be diagnosed with a critical illness than to die in the next 35 years. The financial cost of survival can be huge and money is the last thing one wants to be worried about at such a time. I recommend that they each take out an additional pounds 100,000 of critical illness cover. This would cost pounds 11.22 a month for Huw and pounds 12.62 per month for Cheryl, both with SMA Pegasus.

With regard to income replacement in the event of either of them being unable to work due to accident or illness, both of Huw and Cheryl's respective employers will pay six months' full pay followed by six months' half pay. It then becomes a little hazy as to what happens if you are unable to work in the longer term, such as whether they qualify Ill Health Retirement or not.

If so they would receive a pension based on what you had accrued thus far, which could be very little. If they fail to meet the ill-health retirement criteria, then after receiving sick pay for six months and half pay for another six, they would then be dependent upon State Incapacity Benefit of just over pounds 64 per week, which is taxable.

They may feel more comfortable investing in their own income replacement plan. For example, an income replacement plan for Huw, with a deferred period of 12 months and a benefit of pounds 1,000 per month, index linked to age 60, would cost pounds 14.95 a month. Cheryl would pay pounds 21.18 a month on the same terms. Premiums are higher for women as they are more frequent claimers.

Huw's civil service pension scheme is an excellent scheme in which Huw accrues a guaranteed pension based on the number of years he is a member. If he remains until 60 he will retire three years short of maximum benefits, two thirds of his final salary. If he feels early retirement is important and/or he wants to make up for the three years, he should enquire about the purchases of added years.

Cheryl is also a member of an excellent pension scheme into which she contributes 6 per cent of her basic salary. She accrues 1/60th of her final salary towards a pension for each year worked. It is likely however that Cheryl will have a career break(s), as they do want a family at some point in the future. This would leave a shortfall in her retirement planning and I advise that she enquire about the cost of purchasing added years of service. The benefit of added years over AVC planning is that one is buying guaranteed pension benefits.