Cynthia and her friend have a joint mortgage for pounds 72,500 with separate endowment policies to cover their respective shares of the loan. Cynthia's share is pounds 49,000 and the property is estimated to be worth pounds 120,000 in the present market.
Cynthia pays pounds 250 in mortgage interest each month, pounds 105 for the Scottish Widows endowment, and a further pounds 25 a month for property insurance. There is also an additional loan on the property to cover the cost of a conservatory. Cynthia's share of this is pounds 6,500.
Cynthia's monthly commitments amount to around pounds 800 out of a net salary of pounds 1,450, which leaves her around pounds 500 a month to spend and pounds 150 which is paid into building society savings accounts by standing order. She has a total of around pounds 4,300 in a high-interest building society account.
Cynthia pays pounds 125 a month into the Local Government Superannuation Scheme and pounds 100 a month in free-standing additional voluntary contributions into a Friends Provident FSAVC.
Cynthia is due to be made redundant at the end of July, and expects to receive a lump sum of around pounds 16,000. She is contemplating a career change, perhaps returning to education part-time and studying for an MA. She is prepared to reduce her outgoings by a few hundred pounds a month and to get temporary work during the transition, and wants to know how best to use the pounds 16,000 pay-off and pounds 4,000 of savings to help her through until she is established in a new career, which could take a few years. She also wants to know about putting money aside for higher education for her daughter, but retaining the flexibility to draw on these savings herself in the meantime. What should she do about a pension once she leaves her present employer? Should she be concerned about reports that suggest her endowment might not pay off her mortgage? And is her daughter's and her financial well-being sufficiently protected?
What a financial adviser recommends:
Until her employment position is clearer, Cynthia should beware of making long-term saving commitments or investments that put her precious capital at risk. Now is not the time to squirrel money away for her daughter's higher education - nine years away - that cannot be drawn on in the meantime.
If she makes a realistic reduction in her outgoings to pounds 1,250 a month, through cutting her spending and cancelling the building society standing orders, and does some temporary work, the redundancy lump sum and her existing savings could last two years or more.
A good start to making her savings work harder would be a Tessa account, which pays out tax-free after five years if most of the money saved is left untouched for that period but which can also be accessed earlier if needs be . There are Tessas that offer cost-free easy access; the Coventry building society, now paying 6.65 per cent, is one. You can invest up to pounds 3,000 in the first year of a new Tessa, and a total of pounds 9,000 over five years, and withdraw the equivalent of the net interest without reducing the tax benefits.
To maximise the interest on the rest of her savings, Cynthia should look at postally operated building society accounts; these normally pay better rates than branch-based accounts.
Cynthia should put a hold on tying up further money in pension plans. When she does restart employment she should look at any pension scheme offered by the new employer. Or she could consider a personal pension plan, in which case it would make financial sense to approach Friends Provident, the company running her FSAVC plan.
By many people's standards Cynthia has already made reasonable progress towards a tolerable standard of living in retirement - her local authority pension will be worth pounds 3,600 in today's money when she retires. The actual pension increases in line with inflation. She will be due further income from her Friends Provident AVC pension and, of course, from whatever is left of the state pension scheme.
Her endowment policy should be kept under review to ensure it is on target to pay off her mortgage, but the plan has only been going five years and it would not make good financial sense to stop it now or cash it in to reduce her outgoings.
Cynthia might consider switching from her present variable-rate mortgage with the C&G to a fixed-rate loan to protect herself from expected increases in mortgage rates.
When she leaves employment she will lose the benefit of life insurance provided through her job. She might look to replace this and to take out cover in case she contracts a serious illness to provide a financial safety net. That said, the peace-of-mind of any insurance policies of this kind should be offset against the short-term demands on her money.
q Cynthia Westley was talking to Alistair Conway of the Conway Partnership, a Wimbledon-based independent financial adviser and member of DBS Financial Management, a leading network of IFAs.
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