Money: Ways to protect your income

Case study: two salaries, no children
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NAMES: Tim O'Hara, 34, and Riki Therivel, 36.

BACKGROUND: Tim is a chartered surveyor with the Valuations Office, earning pounds 26,800. Riki is an environmental consultant and a part-time university lecturer. Her income is around pounds 20,000 plus pounds 5,000 from lecturing. Although married for five years, they prefer to keep their finances separate. They have no plans to have children and have a mortgage of pounds 10,000.

Tim has pounds 5,000 in a building society and Riki has pounds 2,500 plus pounds 5,000 in a Tessa, pounds 2,500 in a PEP and pounds 2,000 in a unit trust.

Tim is a member of the Civil Service pension scheme, while Riki belongs to the Universities Superannuation Scheme (USS). She also has a Prudential personal pension for pounds 150 per month. Tim is not sure if he will be working full time in the future and is considering a separate scheme.

ADVICE REQUIRED: Theyrequire advice on regular savings and retirement planning, targeting a pension (in today's terms) of pounds 10,000 for Tim at age 55 and pounds 7,000 for Riki at age 60. Riki is also keen on having green/ethical investments.

THE ADVISER: Bhupinder Anand is financial planning director of Caroline Banks Associates in London (0171-486 2119). He was named Independent Financial Adviser of the Year in 1995.

THE ADVICE: The most important aspect of financial planning is to protect what the couple already have. That is, protect life, health and income. In Tim's and Riki's case, given their lack of dependents and financial independence of each other, life assurance is not necessary. Their most important asset is their income for the next 20 years and beyond.

What is beyond their control is if they lose their income due to a serious illness or accident. Income can be protected either by an income replacement insurance (often called Permanent Health Insurance or PHI) and/or a critical illness insurance, which pays out a tax-free lump sum on diagnosis of a serious illness or a total permanent disability (TPD).

As an example, PHI cover of pounds 1,000 per month would cost pounds 21.55 for Tim (to age 55) and pounds 36.71 for Riki (to age 60), with Royal & Sun Alliance. The company is not the cheapest, but is one of a handful with fixed premiums. The policy is also based on a definition of being unable to follow one's "own" occupation rather than "any" occupation. Critical illness cover of pounds 100,000 for 20 years costs pounds 40.04 a month for Tim and pounds 41.75 for Riki. This is with Scottish Provident which, again, is not the cheapest, but it has similar conditions as above.

Now to savings and pensions. Both Tim and Riki take a balanced view to investment risk. There are broadly two ways of savings, either using a unit trust (or similar), ideally within a PEP, or using an endowment.

The PEP route is flexible but also requires discipline to ensure that premiums are not stopped or reduced for too long, or excessive withdrawals are made. A good with-profits endowment will smooth out any market fluctuations. It also makes a discipline of saving, in that an endowment cannot be easily temporarily suspended. Tim and Riki should split their monthly savings between the two in whatever proportion they prefer. They can also allocate some of their building society deposits similarly.

Some providers I recommend are Perpetual, Schroders and Mercury for the PEP and Commercial Union, Standard Life and Scottish Widows for the endowment. Friends Provident has a good ethical fund, which is Pepable.

With regard to pension planning, Tim should not leave the Civil Service scheme as it is one of the best available. Tim is concerned that if he becomes part-time in his later career, he will receive a reduced pension. In practice, however, if he works for 30 years, 10 of them on half pay, his pension will based on 25 years' service.

Assuming this length of part-time employment, I estimate that Tim's pension will be around pounds 9,000 in today's terms. However, I do not see the need to fund any further for a pension, but to use other more accessible savings.

By contrast, Riki has to mainly fund her own pension. I estimate that Riki needs to contribute around pounds 500 per month gross. However, the maximum she can contribute is 20 per cent of her salary, about pounds 333 per month. She therefore needs to also look at other forms of savings.

Prudential does not offer any ethical funds. A better choice would be NPI whose Global Care fund has performed well.

Riki may also take advantage of a pension planning technique known as "salary sacrifice". This works by reducing her salary by the gross amount of the pension contribution that she wishes to make, say pounds 3,500 per annum. Her employer then pays that contribution to her personal pension instead.

THE VERDICT: Tim says: "I don't like to imagine scenarios where I'm seriously ill or injured. I'll have to think about that. This makeover has been very helpful."

Riki says: "It was sobering to see how much I'll have to start setting aside for a pension. The idea of salary sacrifice is a good one and I'll take it up with my company."

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