Wealth Check: How should we finance a new life in Devon?
Saturday 30 July 2005
Husband and wife Nicola Hawkins and Neville Brown recently moved to Paignton in Devon, with their 18-month-old son, Edward. Nicola is a lecturer and Neville works as a computer programmer. Having sold their London flat, they're currently renting while looking for the right house to buy.
They have put the £124,000 sale proceeds into an ING Direct savings account and have an additional £14,300 of savings to put down as a deposit on the new property, leaving money aside for emergencies. They would also like to invest money for Edward's future, on top of the child trust fund that they have set up with a £250 Government savings voucher.
Nicola contributes to the Teachers' Pension Scheme, a final-salary occupational plan, while Neville is still a member of the money purchase scheme he joined at his previous job - his fund is worth about £7,000. He is also paying 4 per cent of his salary into a similar scheme at his new employer, which matches this pension contribution.
The couple have life insurance worth £117,000, plus one stock market investment. This is a £7,000 holding in a Legal & General tracking fund, which is held within an ISA.
We asked three independent financial advisers - Kevin Morgan of Consilium Financial Planning, Vivienne Starkey of Equal Partners and Marlene Shalton of Chambers Morgan James - to give their advice on the family's finances.
Nicola Hawkins and Neville Brown, Devon
Annual income: £24,000 (Nicola) and £35,000 (Neville).
Savings: £2,140 in a Smile current account and £11,180 in an Egg savings account (Nicola). £1,000 in a Smile current account (Neville). £124,000 ING Direct savings account (this is a joint account). Stocks and shares individual savings account (ISA) worth £7,000, invested in Legal & General index-tracking fund.
Pension: Both Nicola and Neville are members of company pension schemes.
Property: Sold London property and looking for a house in Devon for £200,000-300,000.
Life assurance: £117,000, costing £11 a month.
Vivienne Starkey says Nicola and Neville must review their life insurance policy - it was originally set up to provide a decreasing amount of cover as their mortgage dwindled. However, their new mortgage will be for a larger amount and may have a longer term. And now they have Edward, they will need extra protection.
Kevin Morgan says that life insurance of £117,000 for a couple with a young child is too low. He suggests they look at a low-cost family income benefit plan that would provide a net income of £25,000 a year for a period of 20 years if the worst happens.
On the assumption that the couple are in good health, this insurance would cost £27.49 a month with Royal Liver. With the addition of critical illness cover, the premium increases to £104.60 a month with Legal & General.
Morgan says that Nicola and Neville need to be sure they are getting the most competitive rate of interest on their savings, given the large amount they have invested while they are house hunting.
Morgan suggests Chelsea Building Society's Rainy Day savings account, which requires no notice of withdrawals and a minimum deposit of £500. It is currently paying 5.25 per cent. They could even earn 5.4 per cent from the Chelsea, if they're prepared to give 90 days' notice of withdrawals. But they shouldn't tie up their money for any longer than that, give that it will be needed to pay the deposit on their new home
Starkey is concerned that the couple are not currently using their full ISA allowance and recommends that they do so. They are both entitled to their own £7,000 stocks and shares ISA allowances, or if they don't want the risk of investing more cash in shares, they have a £3,000 annual cash ISA allowance each to take advantage of.
The L&G fund tracks the FTSE All-Share index. Starkey thinks they should also consider a more actively managed investment such as Fidelity's Multi Manager Income or Jupiter Merlin's Growth Portfolio funds. But money that is needed for the house purchase must remain in cash savings.
Morgan points out that Halifax Bank is currently offering a two-year fixed rate of 4.29 per cent, though he thinks an offset deal might work well for Nicola and Neville. With this type of mortgages, it is possible to hold savings and debt in the same account, reducing the size of the loan on which interest is charged.
Starkey thinks Nicola and Neville should look for a repayment mortgage - rather than an interest-only loan - as the amount of interest paid over the term will be much lower and there is no investment risk.
Starkey says that based on the couple's current arrangements, they are heading for a joint retirement income in the region of £36,000 a year. Neville's situation is less secure, because his pension is not guaranteed - she recommends he puts any spare cash into pensions.
Morgan is pleased that Nicola has the comfort of a final salary pension scheme. Neville's official retirement age is 55 according to membership of his scheme. But with contributions of 4 per cent from him and his employer, he will be disappointed with the value of his pension fund at age 55. If Neville really does plan to retire then, Morgan suggests he needs to save more - and to encourage his employer to match whatever he contributes.
Marlene Shalton has a word of warning for Nicola: the Teachers' Pension Review Group is currently examining the terms of its scheme. A variety of changes have been proposed that could reduce what Nicola gets in the future. None of these changes have been agreed, but Nicola should keep an eye on www.teacherspensions.co.uk for updates.
Undergraduates could be under even more financial pressure by the time Edward goes to university. Saving on children's behalf is therefore imperative.
The Government's Child Trust Fund scheme has the same tax treatment as ISAs - no income tax on interest, no higher-rate tax on dividends and no capital gains tax. Shalton thinks this is a good start for Edward. Friends and relations can also contribute up to £1,200 a year to the plans. However, if the couple may wish to make additional arrangements.
One idea is to put aside child benefit of £17 a week. Shalton suggests building this pot up for two to three years, and then investing the money in shares, which should outperform over the longer term.
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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