Financial makeover: A safety net for baby Harry

Stephanie Hayman is 38 and has just become a single parent. Her son, Harry, was born in September, but she is no longer involved with his father. She is on maternity leave from her pounds 35,000 a year job as a housing association manager. Maternity benefit finishes imminently, after which she has next to no income until March when she goes back to work.

Stephanie has a pounds 43,000 mortgage outstanding with the Halifax on a one- bedroom flat in south-west London worth around the same sum. She bought it in 1989 for a higher price. The mortgage is covered by two endowment policies, one in 1987, one in 1989.

She also owns the freehold to the three flats in the house in which she lives from which she gets income from ground rents of pounds 100 a year per flat.

Stephanie has been in an occupational pension scheme for eight years. It is a final salary scheme. She has pounds 5,000 in a tax-free Tessa, pounds 10,000 on instant access with the Co-operative Bank and Halifax shares worth around pounds 3,000.

Understandably, Stephanie wants to ensure her baby son's financial security should the worst happen to her. She is also concerned about her own long- term financial well-being, not least because she does not know how her working life might pan out.

What a financial adviser says:

Stephanie needs life insurance for the next 20 years, a period that would cover Harry until the age when he will be at college or working. The amount of cover needed will depend on the estimated costs of bringing her son up, but pounds 200,000 might be a good figure.

Remember that in theory this money might have to last many years. Such cover might cost around pounds 50 a month.

With a young son who in the event of her death would still need to be looked after, she also needs a will, which can be obtained for as little as pounds 50.

Stephanie also needs to accept that she has more chance of being disabled than killed in an accident, or of suffering a critical illness such as cancer. In such circumstances she would not be able to support her son by working. Critical illness insurance offers a similar lump sum payout to life insurance for these conditions, but it is more expensive; pounds 200,000 of cover might cost Stephanie pounds 140 a month.

The concern is, however, that a lack of income will mean Stephanie cannot afford to maintain this cover.

Stephanie is thinking about moving to increase her and Harry's living space. Whether or not she rents out her existing flat (for which she might get a rent of pounds 450 to pounds 470 a month) she should maintain her endowment policies. Cashing them in early would almost certainly give poor value; they could also be used to help cover the mortgage on her new property.

The pounds 10,000 Stephanie has on instant access (with the Co-op Bank) could get a better return elsewhere. It may be worth putting a good chunk of that money into a notice account, although even with an instant access postal account she could get a rate as high as 7.5 per cent from Alliance & Leicester, through its First Class instant account.

If, in future, she does end up not working, she should complete an IR85 form for any accounts she has (these are available from banks and building societies) so that she can receive interest without deduction of tax.

Ideally, Stephanie ,should save more, especially given that if she stops working she will no longer be building up her pension.

But with little or no income until March, and uncertainty beyond that, Stephanie should err on the side of caution with any "financial shopping". She says her mother will look after Harry, so she will not face childcare costs when working, but her financial planning really will depend on her future income.

Stephanie Hayman was talking to Nigel Harbrook of Monopoly Financial Consultants, an independent financial adviser based in Watford and a member of Financial Options, an IFA network.

If you want to be considered for a financial makeover for publication, which will include a photograph, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, or fax: 0171-293 2096 or 2098; or e-mail: S.Lodge@independent.co.uk. Include details of your financial position, a daytime telephone number, and say why you think you need a makeover.

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