Wealth Check: 'How can I support our baby and still pay for college?'
Saturday 23 April 2005
Joe Medland teaches children with autism and learning difficulties at a primary school in New Cross, south-east London.
Joe Medland teaches children with autism and learning difficulties at a primary school in New Cross, south-east London. He supplements his income by coaching cricket and running after-school clubs. Joe's partner recently gave birth to their first child and she receives the standard government maternity-leave allowance of £100 a week.
The couple set up a savings account about six months ago. Joe now pays between £500 and £750 into this account each month. They are currently living with her parents but would ideally like to buy their own property in a year.
Joe contributes £100 each month towards his partner's Egg loan. She also has a student loan but they do not envisage paying it off in the near future. Joe is doing a part-time social and cultural studies degree at Goldsmiths College - his father paid this year's fees but next year may not be so obliging. His partner is also at university and will have to pay fees in September.
We put Joe's case to Ian Barton at Smith & Williamson Pension Consultancy, Jonathan Fry at Jonathan Fry & Co, and Darius McDermott at Chelsea Financial Services.
Joe Medland, 22, teaching assistant
Salary: £16,800 salary a year, plus an additional £100 a month from part-time jobs (and a weekly £100 maternity-leave payment).
Savings: £3,000 in Alliance & Leicester internet savings account.
Rent: £200 a month.
Pension: 6 per cent of salary contributed to local authority pension scheme.
Debt: £2,500 loan with Egg and student loan.
Monthly outgoings: £100 on loan; £75 travel costs; £250 baby necessities; £200 rent; £500-£750 savings.
Savings and investment
Ian Barton says that to make Joe's savings more tax efficient, he could transfer money into a cash ISA. For example, Alliance & Leicester's internet-based ISA currently pays 5.4 per cent. Putting savings into his partner's name is also a good idea if she is likely to remain a non-taxpayer.
The couple need to focus on short-term priorities: paying off the Egg loan, ensuring they can afford all they need for the new baby, and meeting the cost of university fees. They need to do all this without getting themselves into increased levels of personal debt.
Jonathan Fry recommends investigating the cost of early repayment of the Egg loan, as the interest charged is likely to be much higher than the rate they earn on their savings.
Darius McDermott also suggests a cash ISA. Joe can invest up to £3,000 a year in one of these tax-free accounts: the best rate available at present is from Halifax bank, but the minimum deposit is £3,000. The next best is from National Counties Building Society, which is offering 5.5 per cent a year on a minimum deposit of £1.
With the birth of their first child, they will eventually receive a voucher for a Child Trust Fund (CTF), the government's new savings scheme for kids. This will be for £250 to be invested in the child's name, with an additional £250 available when the child reaches age seven.
The voucher can be invested in a cash deposit account, in shares, or in a mixture of the two. In addition, friends and family can contribute to the account, up to a maximum of £1,200 a year. The Children's Mutual offers a range of equity funds for this purpose and McDermott favours Invesco Perpetual Income fund.
Barton says the Teachers Pension Scheme will provide Joe with valuable final-salary-linked pension benefits. Fry advises Joe's partner to consider her own pension arrangements in the next few years. If she does not become a member of an employer's occupational pension scheme, she can arrange her own stakeholder plan and contribute up to £3,600 a year.
Stakeholder pensions are cheap, says McDermott, charging as little as 1 per cent a year in fees. Contributions can be as small as £20 a month. In addition, the plans are flexible, allowing savers to stop and start contributions to their plan, as and when required.
Barton warns that the couple's plans to buy a property in a year may be over-ambitious. If Joe were able to borrow 3.5 times his total income, then a mortgage of £73,000 could be raised. If savings of £750 per month were achieved for the next 12 months, he would have additional savings of £9,000, plus interest.
The maximum purchase price that could be considered, using all of his savings, would be £82,500. Barton would not recommend that they considered a mortgage with an enhanced borrowing multiple of salary to try to borrow more. While Joe is the sole earner in this family, and with a new baby, this type of mortgage would not be for them.
McDermott says saving for a deposit is essential. Joe is putting aside a good amount each month. Although they do not have a property of their own just yet, they do have a child - some form of income protection, especially as his partner is not receiving full wage at present, is therefore important. Setting up a life insurance policy on a joint life, first death basis would be sensible and inexpensive, he adds.
For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org.
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