Wealth Check: Prescription for a return to financial health

With £20,000 of debts, Kathy Lowe is having trouble managing her money, and seems to be getting deeper into the red. Kathy, 36, works in London for the NHS as the deputy manager of a psychiatric day hospital. She would like to study for a masters degree but is worried about the impact on her finances.

Four years ago, Kathy bought a 30 per cent share in a two-bedroomed flat under a shared ownership scheme with her local housing association. She has no savings, though she has been contributing to the NHS pension scheme since 1995. Kathy would like to pay off her debts in order to boost her available income. She also needs advice on how to invest for the future.

We asked three independent financial advisers for help: James Dalby of Bates Investment, Margie Chavasse of PI Financial Kingsland Wealth Management, and Colin Jackson of Baronworth Investment Services.

CASE NOTES

Kathy Lowe, 36, NHS manager

Personal: Earns £36,000.
Property: Owns 30 per cent of a two-bedroomed flat.
Pension: In NHS pension scheme since 1995.
Savings: None.
Debt: Loan of £18,000 with Tesco; overdraft of £400; £2,000 on credit card.
Monthly expenditure: Mortgage of £280 plus rent of £395; pension contribution of £183; loan and credit card repayments of £465; spending, including bills, of £600.

BUDGETING

Kathy's challenge is to improve her budgeting skills, says James Dalby. She should gain some comfort from the fact she sometimes has funds left over each month, as many people who are in debt don't have any surplus income to cover a social life and holidays.

Kathy should limit her spending until the loan and credit card debts are repaid, he suggests. While the prospect of making changes to her lifestyle will not be appealing, by dealing with the issues now, Kathy will help to set herself up for a better financial future.

DEBT

Dalby thinks Kathy chose wisely when she picked Tesco as the provider of her personal loan, and would suggest staying put as the rate she is paying (6.5 per cent) is very competitive. A seven-year term seems a long-time, but the payments are manageable and the charges are reasonable.

Margie Chavasse would advise Kathy to increase the loan by £2,000 and use this money to pay off her credit card debts, which are more expensive to service. If she keeps the same loan term, her monthly repayments would rise from £265 to £300 but she would not have to pay £200 to her credit card provider.

This would instantly save £165 a month, which Kathy could then save in a tax-free cash individual savings account. Opening the ISA immediately is important, so that she does not become accustomed to the extra money in her pocket. In future, this savings fund could be used to help finance her masters degree.

INVESTMENTS

Colin Jackson accepts that Kathy has barely enough to live on after paying her expenses each month. But he points out that it would be possible to pay a few pounds each month into a stock market fund offering a monthly savings scheme. Holding the fund within an ISA would protect the returns from tax and as long as Kathy does not invest more than £3,000 a year, this will not affect her right to also open a cash ISA.

MORTGAGE

To help reduce her outgoings, Chavasse found two lenders willing to take on Kathy's mortgage at a rate of 4.99 per cent. They were Woolwich, which would also charge legal and valuation fees, and Halifax, which would be fee-free.

Kathy cannot consolidate her £20,000 of debt into the existing mortgage since lenders taking on shared-ownership scheme borrowers do not allow this. However, remortgaging would still reduce her monthly payments by £40 a month.

As Kathy lives in a two-bedroom flat, another option for increasing her income would be to take in a lodger, suggests Jackson, though she will need the agreement of the housing association. Kathy will be able to receive rent of £4,250 before having to pay any tax.

PENSION

Kathy is quite right to contribute to the NHS pension scheme, says Dalby. It provides good value and, as a final salary scheme, doesn't come with any investment risk.

If she remains employed by the NHS she will have accrued 34 years' pension benefits by the time she is 60. This will provide a pension of £15,300 in today's money, based on her current earnings. She will also receive a lump sum of £45,900.

The State Pension, available to Kathy at age 65, will add a further £4,266 at current rates. So her total income at 65 will be about £19,000. If she wants more, Kathy should investigate the option of buying extra years of pension entitlement from her employer.

For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk