Wealth Check: 'Can we prepare for an income fall during teacher training?'

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The Independent Online

The patient

Michael and Jo Tinker are keen to build up both their short and longer-term savings, and also to put aside as much as they can for their two children, Eleanor, three, and Jonathan, 18 months.

Michael, 29, is a music teacher who works part-time at two schools, and part-time as a private guitar and singing tutor. He also does gigs as a solo artist and with a band.

In total, he earns around £1,700 a month; Jo, 30, is a full-time mum.

The Tinkers live in a three-bed mid-terrace house in Sheffield which they part-own with Jo's parents. "We have a mortgage of around £43,000 outstanding," says Jo. "My parents then charge us rent for the other half which costs us £208 per month."

The mortgage is a tracker deal with Barclays/Woolwich at 0.19 per cent above the base rate – so 0.69 per cent. "This is a repayment mortgage and we have made some overpayments," says Jo.

The couple have worked hard to squirrel money away and currently have around £4,000 in a cash individual savings account (ISA) with the Halifax, paying 3 per cent, and £450 in a Barclays ISA which is paying 2.5 per cent.

"Our joint account is the Halifax Reward account which pays £5 per month," says Jo. "Michael also pays his self-employed income into a Barclays current account, and uses a credit card attached to this account to pay for work expenses."

The Tinkers have no other investments, aside from Child Trust Funds for both children with Family Investments; they also receive about £450 a month in tax credits.

Michael is a member of the local government pension scheme through his teaching work, and pays in about £25 a month. At present, Jo has no pension provision in place.

While the couple do use a handful of credit cards, they are disciplined about not accumulating debt.

"We have a Tesco ClubCard and Lloyds TSB Avios card so we can build up points," says Jo. "We take advantage of interest-free periods to buy large items, but are careful to always pay things off in full once that period ends.

"We also try to boost our income by making purchases through Quidco to benefit from cashback."

Both Michael and Jo have student loans of about £15,000 each. "Michael is gradually paying this back, but I haven't paid anything since I stopped working before Eleanor was born in 2009," says Jo.

Michael and Jo pay £5 a month for a mortgage protection policy with Aviva, and £10 a month for a life policy with Legal & General.

"We'd like to know we are doing as much as we can with the little we have," says Jo. "We're not keen on risky investments, but would like to know if there are better places to save our money."

Michael has applied to start the Graduate Teacher Programme this September, and is waiting to hear if he's been accepted. "If he is successful, his income will drop to around £14,000, so we want to ensure we are prepared for this," says Jo. "We'd also like to know if there is any financial support available for that year."

The cure

Our panel of independent financial advisers (IFAs) agree that as the Tinkers are in a period of flux, their main focus should be on protecting the family. They recommend saving hard now to help cover a possible drop in income, but also urge them not to neglect pension saving and investing for the longer term.

Build up a nest egg

Although the Tinkers have limited capacity for saving, they need savings to bridge the gap if Michael starts the teaching training course.

Gemma Standbridge at Plutus Wealth Management says: "It is advisable to have the equivalent of three months' income in cash savings as an emergency fund or 'buffer'."

She recommends holding this in a tax-free Isa.

Duncan Carter at Clearwater Financial Planning adds that while rates on Isas are not that high at the moment, it's vital to keep squirrelling money away. "This will help them to build up some reserve funds which may be needed if Michael starts his GTP," he says.

The AA's internet access Isa is paying 3.5 per cent, and Halifax's three-year fixed-rate Isa is currently paying 4.25 per cent.

Consider share investments

While the Tinkers are risk-averse, it could be worth investing a small amount of their savings into a stocks and shares Isa, says Steven Poulton at Brunning Newman Houghton.

"Cash investments offer no protection against inflation," he says. "Equity Isas needn't be high risk as there are cautious managed funds which could suit the couple's attitude to risk."

Continue with overpayments

The Tinkers are benefiting from a very low rate on their mortgage, and so should try to overpay whenever they can afford to.

"The capital will reduce rapidly and interest rates will rise at some point in the future," says Mr Carter.

"Michael and Jo should also consider converting the equity that Jo's parents pay into a loan. That way, they could gradually buy back their share, rather than paying rent. This will also be more tax-efficient for Jo's parents."

Don't ignore pension saving

Michael is a member of the local government pension scheme, a final salary scheme, and is steadily building a fund by saving every month.

"He's doing the right thing and can sit tight until he knows the outcome of the GTP application," says Mr Carter. "If he's successful, he will then be able to join the Teacher Pension scheme once he's qualified and starts working."

As Jo is a non-earner, she can put a maximum of £2,880 into a pension (£3,600 gross) and will be eligible for tax relief from the Government, says Ms Stanbridge.

"It is worth Jo setting up a simple stakeholder plan where she can contribute on a monthly basis," she says. Contributions can be as little as £20 a month.

Keep up the good discipline with debt

The couple's approach to credit cards is very shrewd, says Mr Poulton.

"It also has multiple benefits, as they are enjoying the rewards of building up loyalty points while also improving their credit score," he says. "However, they must continue to exercise caution, as card debts can escalate quickly if the plastic is not paid off in full."

Mr Carter adds that in the short term, Michael and Jo need not worry too much about paying off their student loans.

"These can be reviewed when Michael's career situation is clearer come September," he says. "Repayments will be suspended if he gets on to the GTP – until his earnings rise above £15,000."

Review protection

Michael and Jo need protection policies that will meet their outgoings should either die, says Mr Carter.

"There are two efficient ways of doing this," he says. "The first is to use an index-linked family protection plan that pays out a regular income, equal to their expenditure for a fixed period.

"The second is to take out term assurance based on the sum of their expenses over the at-risk period. This provides a lump sum on death but cover remains equal throughout the term. This cover is more expensive than a family income plan."

Mr Carter also suggests Michael should take out an income protection policy in the event he cannot work due to ill-health.

"An up-to-date will reflecting their current wishes is also a matter of priority," adds Mr Poulton.

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