Married with a few bob


Tjeerd and Emma married a few months ago. They both work and live in rented accommo- dation in south London. Ideally they would like to buy their own home, but also plan to start a family in a few years time. They have pounds 20,000 in a savings account and no outstanding debts. Apart from their savings they have no other investments, pensions, or life assurance. From their joint income they pay pounds 550 per month in rent and they estimate that they can save pounds 500 per month.

The adviser: Fiona Price, managing director of independent financial and tax advisers Fiona Price & Partners, 33 Great Queen Street, London WC2B 5AA, (0171 430 0366).

The advice: Tjeerd and Emma have a number of financial planning issues that need to be addressed. First, they plan to buy a house in the near future, so money is going to be tight for the next couple of years. Buying a house is always more expensive than we anticipate, luckily they have quite significant savings, part of which they can use as a deposit. They may also want to carry out some home improvements so they should keep their money on deposit.

I would advise them to try not to use all of their savings for house purchase and hold some back as a cash reserve. A general rule of thumb is an amount equivalent to at least three months normal expenditure, which in Tjeerd and Emma's case is roughly pounds 6,000. The new individual savings accounts (ISAs) available from 6 April 1999 are the best home for this.

They should invest pounds 3,000 each in a mini cash ISA, which will give them the benefit of instant access to their cash and tax-free interest. If they have any spare money next year they should look at a mini equity ISA as a home for medium-term savings.

As far as mortgages are concerned, I would advise them to go for a repayment mortgage on a three-year fixed rate with no redemption tie in after the fixed rate period. This will help them to budget and also means they will not be locked into unfavourable rates in three years time if interest rates continue to fall. There are three-year fixed rate mortgages, with no tie in, available at rates of about 5 per cent. There are new deals being announced all the time so it pays to shop around. Do watch out for any compulsory extras.

Tjeerd and Emma had also expressed concern about life cover. A mortgage protection policy on both their lives would provide adequate cover for their needs and will keep their regular outgoings down.

As added protection I would include critical illness cover, which will pay a lump sum equivalent to the outstanding balance of their mortgage in the event of either of them contracting certain serious illnesses. For an initial sum assured of pounds 100,000 they should expect to pay about pounds 30 per month (go for a guaranteed rate rather than a reviewable one). Once they start a family they should increase their life cover significantly.

Another area that needs immediate attention is pension planning. Both of them have never been members of a company scheme nor have they made their own private provision. I would advise them to take out personal pensions immediately.

However, as they are going to have fairly significant outlays over the next few years, with the purchase of a new house and the prospect of starting a family, I suggest that they limit their contributions to about pounds 100 per month each initially. This amount will help to discipline them into making pension contributions but will not overstretch them.

Tjeerd should make sure that every time he receives a pay rise he should also increase his pension. As Emma plans to work part-time once they have children she should be able to maintain a premium of pounds 100 per month even on a reduced income. I would go for level-costed plans, where the charges are spread over the term of the contract rather than taken "up front", and perhaps transfer to the new stakeholder pensions when they become available in 2001.

Finally they need to consider permanent health insurance (PHI), which will provide them with an income when they become ill. They will be entitled to statutory sick pay, however, at pounds 59.55 per week (from 6 April) it is unlikely to go very far. The aim is to provide adequate cover for minimal cost.

The way to achieve this is by having as long a deferment period as possible (the deferment period is the number of weeks you must be ill before the plan pays any benefit).

The first thing they should do is check out how much sick pay they will receive from their employers. Any personal PHI plans should "kick in" once the company benefit stops. To reduce costs further add in the three months emergency cash reserve to the equation.

The steps I have laid out should allow Tjeerd and Emma to buy a house, provide adequate protection, and start making provision for their retirement, without overburdening them. And they should still have enough at the end of the month to build up more short-term savings to help when they start a family.

If you would like a free financial makeover, potentially worth hundreds of pounds, from The Independent's panel of independent financial advisers, please write to Andrew Verity, Free Makeover, The Independent, One Canada Square, Canary Wharf, London E14 5DL. You must be willing for your name, edited financial details and photograph to appear in the newspaper

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