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Cut the cards and look to the future; FINANCIAL MAKEOVER

A family with sizeable debts and no savings gets advice from an independent expert
The Dunnes: Thomas Dunne, a self-employed carpenter, earns pounds 400 a week; Patricia Dunne is a librarian on pounds 20,000 a year. Both are 45, and they have three children, aged 14, 11 and 9.

The Dunnes have no savings or investments. They have a pounds 59,000 mortgage with an endowment policy taken out eight years ago. The mortgage was for 100 per cent of the value of the property in Thornton Heath, Surrey. Mrs Dunne has a pension. They also have pounds 3,500 of credit-card debts, a pounds 2,000 personal loan, a pounds 600 overdraft and a car loan.

The Dunnes say their monthly expenditure leaves no room for regular savings. They are concerned they might not be making the best use of their money. Tom has no pension plan; is it too late to start?

What should they do?

There is no easy solution to the Dunnes' financial difficulties as their debts are quite chunky and it will take some time to clear them and be able to start putting some savings aside.

They are suffering from negative equity: their property is worth just pounds 45,000 against a mortgage of pounds 59,000. This means switching to a new mortgage lender to take advantage of one of the many attractive introductory offers around is not an option. Nor is adding all their other debts to the mortgage loan to reduce the interest cost.

In theory, they could cash in the endowment policy to raise some money but that would also entail switching their mortgage, which would carry costs.

But there are other ways of reducing their outgoings.They have already looked at switching many of their other debts to a low-rate credit card deal. But many of the best rate offers only last six months or so.

Consolidating their debts in a fixed-rate unsecured loan might be a better bet. Northern Rock offers loans with rates as low as 12.9 per cent APR. It may be possible for the Dunnes to save pounds 100 a month while repaying most of their debts over the next three years by switching.

What could they do with this pounds 100? The mortgage is covered by life insurance but what if Tom were unable to work?

Being self employed means Tom's national insurance record is probably much worse than that for someone who is employed, which means little assistance from the state to pay the mortgage if Tom were not working.

Taking out an income protection policy, also called permanent health insurance, would pay Tom an income if he could not work through ill-health. An unemployment insurance policy is much less worth while because the qualifying conditions for self-employed people are very stringent.

Tom's lack of a pension also needs addressing and pounds 100 a month would go some way to building one up. There are plans around that are sufficiently flexible to suit what can be irregular earnings for Tom. The Dunnes, like many people, are sceptical about the high charges levied on all too many personal pension plans.

A personal equity plan is an alternative. PEPs do not offer tax relief on contributions as pensions do, but the payouts are entirely tax-free. And generally they have lower set-up costs.

Tom has an accountant and he should check with him whether the couple are making best use of their tax allowances.

Finally, however unpalatable, perhaps the Dunnes could consider a change in their spending habits to avoid building up new large, high-cost credit card bills.

The Dunnes were talking to Helen Moran of Helen Moran Associates, an independent financial adviser in Coulsdon, Surrey, and a member firm of DBS Financial Management, a leading network of financial advisers.

If you would like to be considered for a financial makeover, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL.