Get me out of this debt trap

Case study: Philippa Gee advises a mother of three
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The Independent Online
NAME: Patricia Olver

DATE OF BIRTH: 5-4-1949

OCCUPATION: Administration manager

BACKGROUND: Patricia is a single parent, with three children, Tara, Sophie and John, living in Berkshire. The last two are still financially dependent on her. She earns pounds 17,500 per year and receives an additional pounds 1,000 a month maintenance for the children from her former husband.

Patricia has a pounds 30,000 interest-only mortgage, which is due to expire in 2011, backed by an endowment policy with Standard Life. She is paying off a number of debts, including a substantial credit card debit, plus home improvement and car loans. She has had a personal pension for the past seven years, into which she pays pounds 210 a month.

THE AIM: Patricia is currently spending up to her income limit and wishes to manage her finances better, decreasing balances on her credit cards. She would also be interested in a better mortgage deal. Maintenance payments will halve in a year's time when Sophie leaves university, and Patricia wants to sort out her affairs to cope with this future loss of income. She also wants to set aside some pounds 3,000 in savings and is relatively risk- averse.

THE ADVISER: Philippa Gee, a director of Gee & Co, fee-based financial planner in Shrewsbury, Shropshire (01743 236982).

THE ADVICE: The interest rates paid on the majority of your debts are excessive and should be immediately reduced. Equally, you have a variable interest rate mortgage and are exposed to potential rate rises. Total payments on your borrowings are currently in excess of pounds 664 per month.

To remedy these concerns, I recommend you apply for a remortgage of pounds 45,000 to cover all existing debts. You should lock into a competitive rate, fixed over a number of years. Nationwide currently offers 6.5 per cent fixed for two years. Your monthly costs would be reduced by nearly pounds 450 to a more manageable initial level of pounds 219.

As well reducing outgoings dramatically, this would give you a known monthly cost to allow you to control your expenditure more. Although this will help solve a lot of your short-term concerns, you should avoid additional borrowing in the future.

The existing mortgage endowment and family bond could repay the proposed new level of mortgage, although the progress of these should be monitored.

The endowment policy is still held in joint names and if you are to be the sole owner of this, Standard Life should be contacted to arrange completion of the relevant paperwork. The endowment is set to mature three years after the repayment date for your existing mortgage and therefore the new mortgage should be based on a slightly longer term to cover this.

We can now turn our attention to your other requirements. You realise that you will not be able to retire until age 65 or later. Based upon your existing provision (assuming contributions continue) and fund performance you could find yourself with a pension of approximately pounds 12,000 or more in today's terms. In addition, you will receive the state pension from age 60.

Another concern is the absence of any savings. You would like to set aside a minimum of pounds 3,000. As you appear to respond better to a strict savings mechanism rather than putting away whatever is left at the end of each month, I suggest a standing order to deduct a set amount every month.

You say that pounds 100 could be saved each month. Together with the pounds 450 released from your borrowings, you will quickly reach pounds 3,000. This then allows you to consider other investments. I suggest either the Cheltenham & Gloucester 30-day notice postal account, currently paying 5.5 per cent gross, or the Scarborough Building Society instant access postal account currently paying 6 per cent gross.

Once this "float" has been set up, you should look each year to see how much of your residual savings are available to invest. Bearing in mind you have no existing investments I suggest you first arrange a Tessa, on a variable rate so that you benefit from future interest rates rises. A rate of 7 per cent is currently available through West Bromwich Building Society, giving a low-risk, tax-free return if held for the full five years.

Next you should consider a single lump sum payment into your pension. Although this will be tied up until retirement, you will obtain tax relief on your contributions and the fund will grow virtually free of tax. You could then consider starting a PEP. However, this would mean investing in equities, which do carry a certain risk. This might not, at least initially, comply with your cautious attitude to investments.

You are concerned about the reduction and eventual withdrawal of the maintenance payments. You do feel, however, that it is likely the children will find work during this period and will therefore be able to provide towards the costs of living at home. I suggest this need, if any, is met from the cash savings you will build up.

Additional life cover is not essential although as you are self-reliant you should consider the financial effects of ill health. You already have income protection and can easily add on to your pension a "waiver" costing around pounds 11 per month, allowing your premiums to be maintained if you were unable to work after a six-month deferment period.

Although quite costly, critical illness cover is also worth consideration. This provides a lump sum on diagnosis of a number of serious illnesses. If we set the contract to cease at age 65, a monthly premium of pounds 50 could provide cover of between pounds 50,000 and pounds 75,000, depending on cover preferred. You should also ensure that your will is promptly rewritten.

THE VERDICT: "I thought the advice was brilliant. I was very impressed with the way Philippa took a difficult problem, that of several debts at high interest rates and came up with a creative solution. The thought of remortgaging for more than at present was not something I had considered. Philippa's approach was extremely efficient and helpful."

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