They have between them meagre savings. Their main objective is to buy a home, which they estimate will cost about pounds 80,000. They think it will take them around two years to save enough to cover the deposit and the initial start-up costs. They each save around pounds 100 per month in an Abbey National instant access account, currently paying interest at 1.4 per cent gross, and at present have around pounds 500 between them in their accounts.
Lucy pays pounds 5 per month into a policy with Sun Life, which she took out 18 months ago, which provides a death benefit of around pounds 15,000. If the performance of the fund into which premiums are paid is maintained, the policy will acquire a small encashment value in a year or so.
The adviser: David Holland, managing director of RK Harrison Financial Planning, with offices in the City of London, Bedford, Salisbury, Exeter, Banbury and Scotland (01234 305555).
The advice: The main short-term objective is to put more money aside to enable them to buy their home. After expenses, Lucy has around pounds 400 surplus from her monthly income. Ian has around pounds 350 surplus.
He should immediately approach his employer to join the company pension scheme. There may be a cost associated with membership, but usually employer- sponsored occupational pension schemes have a substantial contribution from the employer, and therefore represent value for money.
Lucy needs to consider retirement provision, although saving for a home probably takes immediate priority. The depressing news is that, with annuity rates tumbling, each pounds 1 a year of pension at 60 currently costs pounds 18.60 to provide.
To put this into context, if she wanted to retire at 60 on a private pension equivalent to 50 per cent of her then salary, based on realistic projections, she would need to save, if she started her pension today, 203 per cent of her earnings, which is 31.4 per cent more than her current maximum personal pension contribution allowance.
Neither Lucy nor Ian have any income protection in the event of ill-health. We would therefore recommend they each consider a permanent health insurance policy. For Lucy, an annual benefit of pounds 9,250, with a 13-week waiting period and where benefits escalate by RPI, would currently cost pounds 17.20 per month with UNUM. For Ian, a similar policy, but with a maximum annual benefit of pounds 8,000, would currently cost pounds 9.85 per month with Permanent.
They will need to consider in due course some mortgage protection cover. For Lucy, for a sum assured of pounds 38,000, term 25 years, to include critical illness, would cost pounds 6.78 a month from Legal & General. A similar policy for Ian would cost pounds 6.38 a month
After meeting these costs, they should comfortably be able to save pounds 500 per month which, in around two years' time, allowing for the pounds 500 already saved, should accumulate to about pounds 16,900: more than enough to provide a 10 per cent deposit for the home and associated costs.
Because of the short-term nature of their savings for a deposit on the house, they are really not able to benefit from the tax breaks available currently within PEPs and TESSAs or, from the beginning of the next tax year, ISAs, and we have therefore limited our recommendation to maximising the interest on deposit accounts.
In terms of the savings account, they can certainly do better than an Abbey National instant access account. Prudential's much-publicised Egg account currently pays interest at 7.02 per cent (6.55 per cent with cashcard) or they could consider a Woolwich Guernsey-based offshore Sterling International Gross account which, on balances between pounds 500 and pounds 9,999, currently pays gross interest at 5.5 per cent, rising to 6.5 per cent for balances of pounds 10,000 up to pounds 39,999.
This is an instant access postal account, which enables the account holder to specify one of three dates of accrual for tax planning opportunities. For example, with an offshore account interest compounds gross and, if an accrual date of 30 April is selected, interest earned in the current tax year does not have to be declared until the following tax year.
Turning now to the mortgage, while terms are likely to vary between now and the date of purchase, it is worth looking at the best deals currently available in order to understand the principal issues. Firstly, they would be advised to have the property conveyed as "tenants in common" rather than the more normal joint tenants; this will enable them to deal more readily with their respective interests in the property should they decide, at some future date, to go their separate ways. They should seek advice from a solicitor at the time of purchase.Reuse content