Play safe at first, then have an adventure

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The Independent Online
Kate Thomas is 31, single and lives in London. She works for Reed Books, a publisher in South Kensington, as a production manager earning pounds 23,500 a year, although she is due to be made redundant shortly.

She owns a one-bedroom flat, bought in June 1994 for pounds 63,000, which is worth around pounds 90,000. The outstanding repayment-style mortgage is around pounds 43,000, which costs her pounds 330 a month. The loan, with the Halifax, comes to the end of its fixed-rate period this week, when it switches to a variable rate.

Kate also puts pounds 100 a month aside for savings and pounds 170 a month into a separate account for bills. She has a small amount of savings (pounds 2,000) in a tax-free Tessa and around pounds 3,000 of Halifax shares, and a personal pension with Standard Life, though she stopped contributing to this last year when she joined her employer's scheme.

Kate feels she needs a "strategy" for her savings and pension. She is relatively positive about her impending redundancy - she regards being forced to go freelance as an occupational hazard - but is is now faced with a refund of contributions from her old employer's pension scheme.

What a financial adviser recommends:

Overall, Kate is quite "sorted" financially and, although her keenness to get a proper investment strategy is laudable, this needs to be put on hold now because of her redundancy.

What she needs is a two-tier financial strategy that will encompass the short term, before she is settled into self-employment or back into another job, as well as the longer term. Kate is in the fortunate position of having quite reasonable assets, coming redundancy money and something of a savings cushion to fall back on in coming months before she establishes herself again.

It may seem pessimistic, but taking out "critical illness" insurance would be a good value way of upping her general financial security. For pounds 20 a month, Kate would be covered for a payout of pounds 100,000 should she fall seriously ill with a condition like multiple sclerosis. There is no need to take out this policy for ever, just for, say, 10 years by which time she will hopefully have weightier assets to fall back on. But should the worst happen the policy would pay off her mortgage and (as things stand) leave around pounds 60,000 as a contingency fund.

If Kate remains self-employed I would also advise her in six months' time to consider a "permanent health insurance" policy, which would give her an income should she be unable to work through ill-health. The amount of cover, premium and benefit would be determined by her earnings and likely net profit, so there is little point in taking action until this can clearly be identified once she has some trading under her belt.

It is unlikely to be in her interests to switch her mortgage to another lender for a lower rate, because of the costs. She should instead look to negotiate a new deal from the Halifax.

Kate is particularly concerned about her pension arrangements. Because she has not been a member of her employer's pension scheme for long, she will be required to take a refund of contributions when she becomes redundant. She is also concerned that this might be repeated again if she should flit between employment and self-employment.

Generally speaking, it is a good idea to join any occupational scheme available. But instead of making additional voluntary contributions (AVCs), PEPs are probably a better-value, more flexible option. It will be necessary to review any PEP in the light of the Government's plans for Individual Savings Accounts (ISAs), but that is something for the future - ISAs are due to be operational in 1999.

Kate also wants to develop a longer-term investment strategy. She needs to consider what sort of risks she is prepared to take. Kate appears to be a party-going, fun-loving individual who might be happy with an adventurous strategy. Her personal pension is with Standard Life and is a good policy in its managed (general) fund. She might consider its UK Equity and European funds, which would be about a seven on a one to 10 risk scale. Kate has roughly 29 years to retirement so this gives plenty of time for investment fun and games now. As she gets nearer retirement a more cautious approach can be taken.

A similarly adventurous stance should be taken on her personal investments: she might consider the likes of Latin American and growth-oriented European funds. All such investments, however, need to be kept under review, ideally annually. Kate also needs to remember that she needs to keep "rainy day" money equivalent to three months' living costs.

q Kate Thomas was talking to Roddy Kohn of Kohn Cougar, an independent financial adviser in Bristol (0117 946 6384). Earlybirds can also catch Mr Kohn's financial advice on Channel 5's 'News Early' at 6.40am on Fridays.

If you would like to be considered for a financial makeover for publication, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL. Fax: 0171-293 2096 or 2098; e-mail: Please include details of your current financial situation, a daytime telephone number, and state why you think you need a makeover.

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