Christine Giles, 41, wanted to strike a balance between principles and profit by ploughing the majority of her savings into an ethical start-up. She set up Who Cares, an eco-friendly supermarket, three years ago with the help of her partner, Ian Tait, 40. "We had £180,000 between us from savings and property sales when we met," she says. "And put about £150,000 into the business."
The couple live with their three children, Jessica, six, Elizabeth, four, and Daniel, eight months, in Whitley, near Melksham, Wiltshire. Ian recently retired from the Army after 22 years of service; he is now a full-time father.
Before starting a family, when they both worked in the Army, the couple's combined income was £92,000. They now receive a small income from the business, which beside Ian's Armed Forces pension totals about £15,000 a year. In addition, they draw around £300 a week from the business to repay their initial investment, which is used to cover everyday living expenses.
They pay £800 a month for their 25-year, £125,000 repayment mortgage on a five-year fixed rate at 5 per cent with Norwich & Peterborough. "We will pay this off with the proceeds of our endowment policies in seven years," she says. Their three-bed house was bought five years ago for about £150,000, and is now worth £220,000.
They have three, with-profits endowment policies, one with Standard Life and two with Friends Provident, paying £45 a month into each. These are set to pay out about £45,000 each in seven years' time. "We have been warned there might be a slight shortfall, but don't think this will be too significant," she says.
In case of short-term emergencies, they have £3,000 in a stocks and shares ISA with Foresters Friendly Society. "But I'd like to have enough at some stage to leave a reasonable amount for our children," she says.
For long-term planning, she also has an Armed Forced pension scheme that that will be paid when she reaches 55. "This should pay out about £6,000 a year," she says. In addition, she has a personal pension with Lloyds, worth about £5,000, but she is not currently contributing to this. For protection purposes, the family has some life cover with their endowment policies.
With a new business and a young family to care for, there are some important financial decisions to be made, stresses our panel of independent financial advisers (IFAs).
Taking advice on the endowment policies would be a wise first step. Once the proceeds of these are used effectively, the family can start planning for the long term – including building a cash buffer and making tax-efficient pension contributions.
"They should carefully consider what to do with their mortgage," says Matthew Woodbridge from IFA Chelsea Financial Services. The proceeds from the endowments could be used to wipe out a proportion of this early, or at the end of its term. Either way, the couple should be mortgage free in the medium term and able to concentrate on building the business.
They may want to seek professional advice when it comes to what to do with their endowment policies, as this isn't a simple decision.
For starters, they should get a current surrender value for the policies, along with any penalties that might be incurred. "This can be compared with a quote from a traded endowment company to weigh up whether it's wise to continue with the monthly policy payments until maturity or to cash in now and reduce their mortgage," says Mr Woodbridge.
"The bonus rates on with-profits funds have been pitifully low in recent years and certainly not in line with original projections, which is why these funds are showing a shortfall," says Dennis Hall from IFA Yellowtail Financial Planning. "Standard Life and Friends Provident are reasonably strong companies, but that hasn't made them immune to poor returns."
However, as the couple has switched to a repayment mortgage the outstanding balance is being slowly eroded. So proceeds from the endowments are likely to be sufficient to clear this debt despite any shortfall. Even so, they could use the current surrender value to repay a slice of the mortgage early – taking into account any penalties – saving thousands of pounds.
A cash buffer is always essential, but in the current climate this is even more important. At present, the Foresters Friendly Society ISA represents their emergency fund, and so it should be held in cash to avoid against this sum being wiped out by sudden stock market shocks. They cannot switch from a stocks and shares ISA to a cash ISA, so they should open a new account. They may need to safeguard their business from future downturns too.
Each of their children would have qualified for a £250 child trust fund voucher. To provide for their financial future, contributions should be made to these accounts when possible. "The maximum that can be invested each year is £1,200, and a stakeholder plan would provide greatest long-term growth potential," says Philip Pearson from IFA P&P Invest.
Ian and Christine have good final salary schemes with the Army. However, his pension will not increase in line with inflation until he reaches 55, and this will eat into its value. "By the time he reaches age 55 his £9,000 annual payment will have the purchasing power of £6,000 based on a nominal 3 per cent average inflation rate," says Mr Hall. In addition, Christine's pension will not be payable until she reaches age 60. "As she did not complete 16 years of service, it is deferred."
Once the business is more profitable, they should start to make pension contributions ideally of about 10 per cent of profits. Christine should review the charges and performance of her Lloyds pension plan, says Mr Pearson, which may have heftier charges than more recent stakeholder-structured pensions with charges capped at 1.5 per cent a year.
The couple appears quite exposed to any financial shocks that could occur, warns Mr Hall. When endowments are encashed they should buy new life policies, and consider additional prducts such as income protection in case of loss of earnings due to illness.
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