Wealth Check: 'Can I afford to spend less time at work?'

Each week we give 'Independent on Sunday' readers a financial makeover

The problem

Holly Wells and her husband Steve hope to start a family in the next few years and plan to spend as much time as possible with their children. To do this, their dream is to switch to part-time work. "We'd like to be able to reduce our working hours but first ensure we've made adequate provision for the potential pay cuts," says Holly.

Their biggest concern is clearing the mortgage on their £200,000 three-bed house. They currently have a discount tracker repayment deal with the Nationwide building society at a rate of 4.74 per cent, but worry about how long it will take them to pay this off in full.

Although financial planning for a family is paramount, they plan to invest in their home and are considering a loft conversion.

Holly has worked hard to put money aside. She has £500 in a Britannia building society account, £3,000 in an ING savings account and £4,000 lying in a current account with the Co-op.

She also has £9,000 spread across three mini cash individual savings accounts (ISAs) - one with First Direct and two with Nationwide.

A further £2,800 is invested in premium bonds, 250 shares with AstraZeneca and £1,900 in a Nationwide equity ISA.

Holly pays 4 per cent of her salary into a money purchase pension scheme at work, and also has a small private pension with Lloyds TSB.

She has no other loans or debts, and also has no life insurance or income protection.

The patient

Holly Wells, 29, from Macclesfield, Cheshire.
Job: building society business manager.
Income: £22,000.
Savings: £9,000 in three mini cash ISAs, £500 in a building society account, £3,000 in a bank savings account and £4,000 in a current account.
Investments: £1,900 in an equity ISA, £2,800 in premium bonds and 250 shares in drugs group AstraZeneca.
Goal: to cut her mortgage term to achieve flexible working hours and start a family.

The cure: Overpay now to ease the mortgage strain

To reduce the term of her mortgage, Holly should think about making overpayments, says Kevin Anderson at independent financial adviser (IFA) Budge & Co.

Gillian Cardy from IFA Professional Partnerships says it is almost always better to repay debt than anything else. "Holly's surplus income and capital is best applied to bringing down the mortgage. This will reduce the couple's outgoings in the future."

Savings

Holly should reconsider the amount of money she has in her current account, says Anna Bowes at IFA Chase de Vere. She recommends moving the £4,000 to an account such as that offered by Egg paying 5.5 per cent gross - including a 0.75 per cent bonus for the first six months - or Alliance & Leicester's Online Saver account, which pays 5.35 per cent gross.

Ms Bowes notes that Holly's First Direct mini cash ISA is also pretty uncompetitive, paying just 4.28 per cent tax-free. "This is lower than base rate. The Nationwide ISA is more competitive at 5.15 per cent, but there are better deals around, such as Abbey paying 5.35 per cent."

Holly should continue to use up her full cash ISA allowance each year, says Mr Anderson - especially in view of the Government's plans to keep the annual limit at £3,000 instead of slashing it to £1,000.

Investments

Instead of holding nearly £5,000 solely in AstraZeneca shares, Holly could consider cashing these in and diversifying into a unit trust to spread the risk.

This would preferably be via a mini stocks and shares ISA on top of the Nationwide equity ISA, says Ms Bowes.

Mr Anderson points out that AstraZeneca shares have fallen nearly 40 per cent from their high in February last year.

The money she holds in premium bonds produces very little income, though she is in with a chance of winning a £1m jackpot, he adds.

Property

Holly can make overpayments of up to £500 a month penalty free on her home loan, says Ms Bowes. These will chip away at the capital value of the home and bring down the mortgage term.

Ms Bowes suggests that Holly could cash in some of her AstraZeneca shares and use the proceeds for the overpayments.

Mr Anderson warns Holly and her husband to be careful of spending too much on the house. "It will have finite value," he says. "Continual improvements may not go on adding any more to it."

Pension

Holly should be aiming to save 15 per cent of her salary, says Ms Bowes. "Earlier contributions are very important as they are invested for the longest time."

Once Holly has reduced the mortgage, she should use her surplus income to step up her pension contributions, adds Ms Cardy.

Protection

As homeowners, the couple should consider life insurance to cover the mortgage if one of them were to die, says Ms Bowes. This will be particularly important when they start a family.

Holly and Steve should check what is offered by their employers in terms of cover for long-term ill-health or death benefits, says Ms Cardy.

If you would like a financial makeover, write to Sam Dunn at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email s.dunn@independent.co.uk

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