How to keep your head when the axe falls

FINANCIAL MAKEOVER; In the second of our series, a reader receives expert advice on the best way to use his redundancy cash

The Parris family: Mr Parris is 45, his wife, 42. They have four children aged 3, 4, 13, and 16.

Occupation: Mr Parris was made redundant in December by the BBC, where he designed sets. Mrs Parris has her own business as scenic artist, painting backdrops for advertisements and the like.

Salary: Mrs Parris earns pounds 5,000 a year, Mr Parris was on pounds 40,000. He was given pounds 64,000 in redundancy, having worked for the BBC since 1977, and is owed a further pounds 4,000.

Pension: Mr Parris has a BBC pension into which he has just put pounds 15,000 of his redundancy money. Mrs Parris has a personal pension with Allied Dunbar.

Mortgage: Paid off, on a house in Chiswick, London, worth between pounds 350,000 and pounds 400,000.

Savings and investments: pounds 34,500 in the bank, pounds 25,000 in the building society, pounds 8,500 in a tax-exempt special savings account , pounds 20,000 in premium bonds, nearly pounds 20,000 in shares and pounds 2,500 in National Savings for the children.

Like it or not, Mr Parris is leaving behind 18 years on a salary with the BBC and entering the world of self-employment. His wife is already self-employed but with two young children her earnings have been relatively low in recent years.

Mr Parris wants to know what to do with his redundancy money, both to get the most from it and to meet his family's financial needs.

These include school fees totalling pounds 7,750 a year. The oldest daughter has a place at Roedean girls' school starting in the autumn, which would cost a further pounds 14,000 a year. Mr and Mrs Parris, while keen for her to go, are concerned at the cost.

What should they do?

Notwithstanding Mr Parris's redundancy, in a number of other ways the family is in good financial shape. They have no mortgage on what is a valuable house, and at worst could always trade down to use some of this capital. Mrs Parris, while not earning much at the moment, has in the past earned pounds 60,000 in a year and is adamant there is plenty of work around for her if she chooses to take it.

That said, now is not the time to be lobbing all that redundancy money into long-term investments like stocks and shares and personal equity plans. Until the family's future income pattern is established (Mr Parris is setting himself up as a freelance production designer, while Mrs Parris may increase her workload) they should keep the money in the building society.

Given the amount of money they have, they can afford to put some in notice accounts to get more interest. Postal accounts can also be a good way of squeezing more interest out of savings.

For the next few months school fees can be met from the pounds 4,000 owed by the BBC and, if necessary, existing capital until income picks up. They should really be thinking about meeting school fees out of income, although that might need reconsidering depending on how the couple's earnings pick up again in the future. With this in mind, a decision regarding their eldest daughter going to Roedean should (and can) be put on hold for a few months.

Neither Mr nor Mrs Parris have any life insurance, nor insurance should they not be able to work through ill-health.

Life insurance and what is called critical illness insurance should be priorities as financial safety nets for the family should the worst happen. Income protection insurance, also called permanent health insurance, which pays out a percentage of income, can wait a few months, until it is clear what earnings they have and therefore what should be protected. A full review of their pension plans is also necessary, but again this can wait a little. They need to think about what level of income they will need when they retire, from which a required level of saving can be established.

Finally, the Parrises wisely made wills last year. Given the value of their house, if they were to die the estate would be subject to inheritance tax. This, however, has been described as an avoidable tax in that there are wheezes for reducing your potential liability. Their wills need to be re-examined to ensure they are making full use of relevant allowances.

The Parris family were talking to Alastair Conway of The Conway Partnership, independent financial advisers in south-west London.

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.

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