Wealth check: 'Are a second child and a forever home possible?'
A couple hope to have another baby in a new house in five years, but a salary freeze and low interest rates are hampering their progress
Fiona and Lance Plummer, both 28, want to save for a second child, but are struggling with frozen pay and low interest rates.
Their daughter Esme is a year old, and they would like a sibling for her within the next five years. "We are saving for this – and hope also to buy a 'forever' family home in the same time period so that we can settle into family life," Fiona says.
Lance, a police officer, and Fiona, a part-time teacher, have a combined income of around £40,000 a year. "But we're both subject to salary freezes," she says. "Lance's income won't increase until September 2014, and mine is frozen until next year, so we have to work with what we've got."
At present, they pay £718 a month for a 35-year, £175,000 repayment mortgage with Nationwide at a rate of 1.94 per cent above base rate – currently 2.44 per cent. They bought their three-bedroom, semi-detached house in Southampton in December 2008 for £191,250.
"We would like to buy the sort of 'forever' home that everyone dreams of for their family," she says. "The spacious four-bed house with a big garden in a quiet and safe village with good schools near by – in our area, at minimum this would cost £300,000." However, she adds that "this feels a long way off" in the current climate.
They have a joint current account with Co-operative Bank that holds both salaries and which they use to pay bills, alongside separate accounts for personal use.
At present, they also try to save around £300 a month into a saving account paying 0.25 per cent, also with Co-operative, to pay for holidays and use as an "emergency fund".
Lance has contributed to the Police Credit Union savings scheme with a rate of 2 per cent for the past six months, paying in £100 a month.
For Esme's future, they opened a Junior ISA with Fidelity. This holds around £1,200 spread between Henderson European and First State Asia Pacific funds.
For longer-term planning, they have both been paying into their employers' pension plans for four years.
Turning to debt, they have £16,000 in student loans. Lance has also been paying £60 a month since May last year for the Cycle to Work Scheme. "This is an 18-month scheme," says Fiona. "Lance got a voucher for £1,000 from the government and bought a bike and safety gear to get to work." She adds: "This allowed us to go down to one car, saving around £1,900 a year – so it's been worth the money."
For protection purposes, Lance has various forms of cover alongside his work. "He is provided with all sorts of insurance policies from death-in-service to dental and travel cover," says Fiona. "The life cover, for example, provides around £180,000 on death and about £5,000 for other injuries like the loss of a limb."
Fiona and Lance have a clear plan to save for a second child and to upsize to a £300,000 house. "This will require careful budgeting," says Andrew Reeves from independent financial adviser The Investment Coach.
Even so, they are sensible to be considering their financial situation and how to maximise their incomes, stress our panel of independent of IFAs.
"Starting a family creates a severe strain on finances and even more so if a second child is planned," says Philip Pearson from Southampton-based P&P Invest. "The best way to overcome this is to budget and make provision for regular monthly saving. One option is to keep a diary for a month where every item of expenditure is recorded to see how much can be saved." They should include everything paid for by cash or card.
Fiona says they save around £300 a month to pay for insurance and other extras. "They should check out cashback websites such as Quidco and Topcashback to see if they can get benefit from money back when paying for anything. Also use price comparison sites at renewal time," says Mr Reeves. "As Esme is a year old Fiona and Lance could consider saving for nursery with childcare vouchers," he adds. "As the money comes directly from gross pay this also saves income tax and national insurance, and both their occupations are likely to come with schemes to take advantage of this." They can claim up to £55 a week under this scheme.
"Interest paid on regular savings into the Co-operative account and Lance's savings in the Police Credit Union is taxable, so moving this money into a tax-efficient cash ISA will enhance their return," says Gareth Reynolds from MGS Financial. Cheshire Building Society is currently offering one paying 3.35 per cent on its cash ISA.
"The Police Credit Union does come with life cover at no extra cost, but the couple should compare the term insurance rates they could get elsewhere and might be surprised how low the equivalent monthly premium would be to replicate this benefit – even in a high-risk occupation like policing," says Mr Reeves.
Fiona and Lance should ensure they can easily review the Junior ISA every six months or so as the investment funds are relatively high-risk – although given the long-term timeframe this might be the best option.
Unfortunately, the "forever home" could be a tough objective. "They would need a chunky deposit," says Mr Reynolds. "And as they have a small amount of equity in their current home with little prospect of this increasing in the short-term, this would probably have to be met from savings."
Unless the Plummers have a significant salary rise, the advisers agree there is little chance of them moving to a bigger home in the same area in the next five years. "They should discuss their dreams with their parents to see if any help can be provided in meeting the cost of their next home," says Mr Pearson.
"If this is not available, then they will need to make a significant effort in building up cash savings over at least five years."
Lance and Fiona should continue to pay off their student loans gradually and, once the bicycle loan has been repaid, the £60 a month should be re-directed into regular monthly savings through a cash ISA.
They should also avoid taking on further debt, stress the advisers, and concentrate on saving and meeting the repayments on their mortgage.
"While Lance has protection, £180,000 in the event of his death would take care of any mortgage and debts, but leave little else," warns Mr Reynolds. "A separate policy could be arranged to provide a monthly income until Esme's 21st birthday or beyond – this should be index-linked to give Fiona a replacement for Lance's lost salary."
Fiona should also consider putting cover in place for herself. One option is a family income benefit policy. This provides a regular income over a fixed term and is ideal for meeting the needs of a young family, says Mr Pearson.
"They could consider a joint life plan providing a benefit of, say, £1,200 each month in the event of death or diagnosis of critical illness." This can be bought through Scottish Provident, for example, for a monthly premium of only £5.54 a month, he adds.
Critical illness plans should be considered as this is more likely to occur than early death. "As both are relatively young, it will be cheaper than delaying as the cost increases with age," says Mr Reynolds. "Protection is always the last priority for most people, but is very important."
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