Wealth Check: 'How do we fund children's degrees and our pensions?'
A couple who want to support their son and daughter through university but also ensure a comfortable retirement need to rapidly increase their savings
Sunday 11 November 2012
Mark and Linda Wilkinson from Camberley, Surrey, would like to start saving more for the future – to help their two children through university and to keep their own pension plans on track.
Mark, 46, works as a production support manager and earns around £57,000. His wife, Linda, works as an optometrist and earns around £27,000, plus regular bonuses.
"Our daughter Anna, 17, has just left private education and is now at college," says Mark. "Our son, Jamie, 13, still has three years of private education to go. We are really keen to build up a bigger pot of savings to help both children through university, as we know this will be a very costly time for the whole family."
At present, the couple have around £1,800 in a savings account with Virgin Money earning 2.25 per cent. Aside from this, they have no other savings or investments.
Looking to the longer term, Mark has a pension with his current employer, and gets employer contributions of 7.5 per cent. At present, he is not paying in himself.
"I also have a balance of £139,000 in the pension scheme I had with my last employer," he says. "Linda has a stakeholder pension with Virgin Money and pays in £80 per month."
While the couple do have credit cards, they are disciplined about how they use them. "With our 0 per cent purchase cards, a Tesco Clubcard and a Barclaycard Platinum Visa card, we pay off the minimum and put the balance into savings," says Mark. "We pay off our Capital One Aspire World cashback card in full each month. We also make purchases through Quidco whenever we can, so we can earn cashback."
The couple own a five-bedroom detached house in Surrey which they bought in 2010 for £389,000. They have a mortgage of £215,000 with Britannia building society and this is covered by two accounts.
"There is one account charging 4.39 per cent fixed until April 2014, with a current balance of £115,000," says Mark. "The other account has a balance of £100,000 and is at a rate of 4.49 per cent fixed until April 2013. Both are repayment deals."
At present, the couple have no protection policies in place – and would like to know where to start.
"We are also keen to find out whether we on track for a comfortable retirement," says Mark. "In addition, we'd like to know whether there are other areas we can make savings so that we can put more money away for both our children's – and our own – futures."
Our panel of independent financial advisers agree that Mark and Linda are in an expensive "phase" of life and advise them to focus on ways to build up their savings. In addition, they commend them on their approach to debt, but recommend they review their lack of protection insurance as a matter of urgency.
Take steps to save more
While Mark and Linda do have some cash savings, they need to do more, according to Patrick Connolly from AWD Chase de Vere. "As a starting point, they should look to build additional cash savings for any short-term emergencies," he says.
This is a view shared by Danny Cox from Hargreaves Lansdown who recommends that this pot should be between six and 12 months' expenditure.
"They should hold cash savings in an individual savings account (Isa) to improve the returns by removing the tax paid on the interest," he says. "Mark and Linda each have an annual cash Isa allowance of £5,640. To get into a good habit, they should also try and pay into a savings account straight after payday, as if they leave it until the end of the month, saving is likely to be less successful."
If the couple are determined to save more, they have two main options, according to Nick Evans from One Life Wealth Planning.
"They either need to increase their income, or take a closer look at their spending to see if they can re-prioritise," he says. "The good news is, the family finances should get easier once private education costs come to an end."
Planning for university costs
Given that university costs could be significant, Mark and Linda need to think carefully about how much help they wish to provide, says Mr Evans. "Given their joint income, grants are unlikely to be available," he says. "The dilemma for the couple will be what proportion of their children's university costs should be self-funded, and how much should be borrowed through the student finance scheme."
Mr Connolly adds that if the couple decide to fund university costs out of income, there is a risk of that income being reduced if either of them lost their jobs.
"It is already too late for Mark and Linda to build up all the necessary savings needed before university costs are due," he says. "However, any savings they can make in advance will put less pressure on their income; they need to start saving seriously now."
Given the short time horizon, Mr Connolly recommends most of this should be done through cash accounts, such as Isas.
"While cash savings rates may not be particularly attractive right now, Mark and Linda should not select higher-risk investments," he says. "They cannot afford to risk their money falling significantly as there is very little time to make up any losses."
Think carefully about retirement planning
While Mark and Linda are making reasonable contributions into their pension schemes, they need to build upon these amounts as their disposable income increases, says Mr Cox.
"As a rule of thumb, to achieve an income in retirement of broadly between half and two-thirds of their current earnings, they should be contributing a percentage equal to half their age," he says.
"For example, Mark should be paying in 23 per cent. This may not be achievable in the short-term, but Mark should certainly be making further contributions."
Mr Evans warns that in part, Mark and Linda's goals for retirement will conflict with their desire to support their children's education.
"I'd urge both of them to give real consideration now to how much income they are likely to need – and what they can expect from their current arrangements," he says.
He suggests a good starting point would be a free, online calculator, such as Moneyadviceservice.org.uk/en/tools/pension-calculator, as this could help them manage their expectations and prioritise their goals.
Mr Connolly says that as the couple are heavily skewed towards pensions at the moment, they would be wise to consider a combination of pensions and Isas.
"While pensions provide initial tax relief, they are inflexible," he says. "With Isas, investors can get access to their money whenever they want," he says. "The couple can invest up to £11,280 a year, of which up to half can be in cash; they should focus on both cash and investment Isas to fund university costs and to help boost their long-term retirement planning."
Don't ignore protection
Given that the couple have a pretty sizeable mortgage and also a particular reliance on Mark's income, they need to think about protection policies as a matter of urgency, according to Mr Evans.
"As a very minimum they should ensure their mortgage could be repaid in the event of either death," he says. "However, they should also give some consideration to additional life cover for family security.
"In addition, they should consider income protection to protect their earnings if they are unable to work due to long-term illness or injury."
As a starting point, Mr Cox urges Mark and Linda to speak with their employers to find out if they provide any of these benefits, as many do.
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