Wealth Check: A baby, a mortgage and studies? Time to secure the future
Saturday 28 November 2009
Edith Cupper, a 25-year-old mum from Tonbridge, has to juggle a baby, studies and a mortgage while still looking after the piggy bank. She is studying for a maths degree with The Open University and hopes to one day train as a teacher.
She says: "I recently had my first child, Isaac. He's just turned one and likes to get himself into all sorts of mischief, but we have a great time together. In six years' time I'd like to be on a teacher's salary and have a mortgage on a full property."
Edith and her partner, Ben, who works as a teaching assistant, own a quarter of their semi-detached house on a part-buy, part-rent scheme with a housing association. Their mortgage is for £43,500.
She wants to prepare for Isaac's future by securing her finances while following her own career ambitions.
Income: £14,000 from partner's earnings and child-related benefits
Savings: £1,000 in premium bonds, £2,000 in an ISA account
Mortgage: £43,500 fixed for three years at 6.5 per cent
Offering advice this week are independent financial advisers Danny Cox from Hargreaves Lansdown, Kevin Anderson from Budge and Company and Mel Kenny, from Radcliffe & Newlands.
Edith owns a quarter of her property at the moment, so to get a mortgage on the whole thing in six years is going to take a lot of work. "This is an admirable objective, but will require substantial savings," says Anderson. "Currently the maximum lending on a shared equity house is 85 per cent, so it will be necessary to start saving as soon as practically possible."
Edith has a fixed rate mortgage at 6.5 per cent for three years with Nationwide. Although she would like to change to a variable rate to get a better deal, Cox says the building society will not allow her to switch. There is also the possibility of remortgaging with another lender, but it might be risky and she's not keen on gambling.
Anderson says: "There will almost certainly be penalties for early repayment and these may be substantial and will almost certainly outweigh any savings in interest rate."
Anderson praises Edith's "very bold career choice" but says the next few years could be a struggle. He says: "In the long term this could turn out to be a life-changing decision, but it's time at the moment to batten down the hatches."
This means building up savings, and Edith has made a good start with ISAs and Premium Bonds. However, Kenny thinks she could get a better deal. He says: "She should make sure her savings work harder for her.
"While the cheques in the post give a great feel-good factor, Premium Bonds currently only give an average annual return of 1.5 per cent tax free." Instead, he suggests trying instant access cash ISAs, which can pay at least 3 per cent tax-free.
Cox also suggests increasing the family's disposable income, both by shopping around for better deals on utilities and considering a part-time job. She should also make sure she is receiving all the benefits she is entitled to.
These savings will come in handy when she studies for the PGCE teaching qualification in three years' time, although according to Anderson, she could also get a tax-free bursary or a maintenance grant from the Government.
Teaching is a great career choice, and if Edith makes it to the age of 68 in the profession she can look forward to a generous pension under the Teachers' Pension Scheme (TPS), according to Kenny. "The TPS is a gold-plated final salary scheme providing the promise of a pension based on salary and years of service," he says. "Even if the scheme becomes less generous, there is nonetheless likely to be a strong subsidy in place to cater for her retirement needs."
It's not easy thinking of the worst-case scenario, but Edith and Ben have both been smart to take out life insurance, which should help take care of Isaac should anything happen to them. Kenny says they should check it is sufficient and consider lump sum critical illness cover.
He adds: "Her partner should also consider income protection to protect his monthly income in the event of long-term illness or incapacity that prevents him from working."
As a matter of urgency, however, Edith needs to make a will stipulating what will happen to the estate and Isaac. Cox says: "A will ensures that the right people benefit from the estate if she dies, and, importantly, makes her wishes clear with respect to Isaac's guardianship."
Kenny adds: "[Without a will] should they not survive their son's dependency, then aside of having to go through the rigmarole of intestacy, the deceased's assets not held jointly would be placed into a difficult-to-access statutory trust for their son. A will can ensure assets are either directly passed to the survivor or held in a privately arranged trust."
For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email firstname.lastname@example.org
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