Playing safe for the boy

Financial Makeover NAME MAY BERKOUWER AGE 39 OCCUPATION SELF-EMPLOYED TEXTILE CONSERVATOR

MAY HAS a variable income of between pounds 13,000 and pounds 16,000 per annum and is in the process of increasing her mortgage to pounds 46,000 on a property which is worth pounds 86,000. It is a repayment mortgage on the variable rate with Nationwide Building Society. There is a decreasing form of life assurance cover of pounds 32,000 in place to cover the original loan.

Any pension contributions have been ad hoc, and since May came to the UK from Holland in 1984, there have been breaks in employment. Other savings include pounds 2,000 in a Nationwide Bonus Saver account, pounds 1,400 in a Jupiter PEP and 450 Woolwich Shares.

May has recently separated from her partner and has responsibility for her three-year-old son. The main objective is to secure the financial future of May and her son. May describes herself as a cautious investor, with a preference for ethical investments.

The advisor: Gordon Wilson, consultant with the Aitchison & Colegrave Group, The Independent Financial Advisers, 10 Park Circus. Glasgow G3 6AX (0141-332 5961).

The advice: The mortgage is being increased as part of the separation agreement and the Nationwide have been approached in this regard. If it is not too late, the Halifax could also be approached as they are offering some excellent remortgage deals at present. The Halifax is one of the few lenders who would not charge a Mortgage Guarantee Premium, or an arrangement fee, and it will pay the solicitors and surveyors fees, as part of its rapid remortgage scheme.

With interest rates falling, it is worth considering a discounted or capped-rate mortgage. The Halifax is currently offering a four-year capped rate of 6.69 per cent with no redemption penalties thereafter. This would mean that May's mortgage would not increase beyond 6.69 per cent during the four-year period, but it could fall if rates fall far enough. This could represent a monthly saving of nearly pounds 50 per month to May which could be channelled towards pension or life assurance provision.

It is also important to ensure that the mortgage loan is repaid on the death of May. As this is a repayment mortgage, it is best covered at lowest cost, with a decreasing term assurance. Legal & General can provide pounds 46,000 of cover over a 20-year term at a cost of pounds 6.01 per month.

Critical illness cover for the mortgage should also be given careful consideration, as you are far more likely to be diagnosed with a critical illness - for example, heart attack, cancer, or stroke - than to die. The great thing about critical illness insurance is that you will still be around to benefit from it, should a claim arise. A combined mortgage protection plan, covering pounds 46,000 on a decreasing term basis, which would pay out on the earlier of critical illness or death, can be secured from Swiss Life for pounds 18.09 per month.

As May has a young son who would need to be cared for in the event of her death, life assurance is very important. To keep costs down, a family income benefit policy should be considered. This type of policy would provide a source of tax free annual income which would allow the guardian to feed, clothe and educate May's son. Scottish Provident can provide a policy which would pay an income of pounds 6,000 per year, increasing for the next 20 years, for pounds 11.90 per month. Although this may not cover all the costs, there would also be a sum of around pounds 86,000 realised from the property sale which could be invested.

It would also be prudent for May to effect a life assurance policy on the life of her ex-partner to protect the maintenance payments.

An income protection plan would replace a proportion of May's income if she was unable to work as a result of illness or accident. As May is self employed, this is very important.

As May has a variable income and would like to keep a tight rein on regular monthly commitments, any pension planning should be reviewed at the end of the tax year and a single payment made. In the meantime, any surplus income should be saved in an instant access account for this purpose. As the financial situation improves, making a regular contribution could be beneficial as the investment risk is lessened if premiums are paid monthly.

May has a with-profit personal pension with Equitable Life, and a unit- linked pension, invested in the Global Care fund with NPI. The NPI fund in particular has an excellent performance record since launch in March 1996. I would recommend that the contributions continue to be split between the two companies. Equitable Life has a good with-profit record and this provides a strong base to May's pension planning. The NPI fund has the potential to outperform but the value will fluctuate over time.

As May has not been in continuous employment, her National Insurance record may not be up to date, which could lead to her receiving a reduced state pension. A Benefits Agency BR19 form should be completed and returned, to identify any shortfalls in order that action can be taken if necessary.

Regarding investments, the existing Nationwide Bonus Saver Account should be kept open, as it pays a very handsome 8.2 per cent gross; provided contributions are maintained for one year. There also remains a chance that the Nationwide could demutualise, resulting in a windfall for May.

May should also open a Tessa, even with a small amount, as this is the last year that this can be done. I would recommend the Yorkshire or Dunfermline Building Societies, both of which are still mutual societies, and their returns to date have been very competitive.

The Jupiter Ecology PEP should be retained in spite of recent stock market difficulties. This should be seen as a medium- to long-term investment, and as Jupiter has a range of funds which can de- monstrate consistently competitive returns, I would expect this investment to do well.

As May's only shareholding is in one company, the Woolwich, I would recommend that it is sold in order to diversify. Holding individual company shares involves considerable risk which is not in line with May's cautious attitude towards investment. The proceeds could be used to top up the pension, which would have the effect of reducing May's tax bill, as the contribution would attract tax relief at 23 per cent.

Any life assurance plans should be written in trust to ensure that the benefits are used to provide for May's son as intended.

Finally, I would recommend that May has a will written, as many problems can arise following a change in circumstance such as this. During November, many solicitors will waive their fees for writing a will in return for a donation to Will Aid, a group of charities.