Wealth Check: Single mother finds strong work ethic costs her dear

Kathleen Hallam, 39, calls herself a "disillusioned single parent". She works three days a week for the Pension Service in Nottingham while her four-year-old, Thomas, is in a nursery. She wanted to return to work after his birth, but feels her salary is too low to make it pay.

"I'd probably be better on income support," she says. "I'd get my rent and council tax paid and £100 a week in my hand." Ms Hallam took a degree in social sciences at 31. "I was working at Boots and hated it," she says. She graduated five years ago £1,500 in debt.

"Normally, I take home £616 a month," Ms Hallam says. Thomas's nursery costs £400 a month. "The child tax credit is supposed to cover 70 per cent of childcare costs. I still have to find 30 per cent and sometimes it's more than £200 a month. I can't save."

We put Ms Hallam's case to Darius McDermott, of Chelsea Financial Services, Jennifer Storrow, of Gee and Company and Nick Breton, of The MarketPlace

KATHLEEN HALLAM, 39, CIVIL SERVANT

Family: Son aged four

Education: Degree in social science

Debts: £1,500 student overdraft; credit card

Salary: £6,889 a year

Child allowance: £16.55 a week; working tax credit £3.77 a day; child tax credit £71 a week

Savings: None

Pension: Civil service one

Property: Council tenant, £43.77 a week

Outgoings: (Per month): child care £400; council tax £57; bills £108

EXPENDITURE

Mr McDermott notes that Ms Hallam normally takes home £616 per month, including her working tax credit. Adding on her monthly £66.20 child allowance and her £284 child tax credit, her income is £966.20. Her biggest expense is child care at £400 a month. When her bills, council tax and rent are taken off she has £226 each month. This does not leave much room for other expenses, especially if she wishes to save. One option is to search for a job that pays more, although that would mean leaving the Civil Service pension scheme.

Ms Storrow says the only part of Ms Hallam's expenditure she can change is child care. She should consider a child minder and Social services has a list of approved carers. She could also consider paying the mother of one of her son's friends to care for him after school. A reciprocal arrangement could be made when Ms Hallam is on holiday.

DEBTS

Ms Storrow says Ms Hallam should think about combining her credit card and bank loan when the bank ends her student facility, which will be soon. She should shop around for the best deal. Her local library should stock the monthly publication Moneyfacts, which will give her more information.

Mr McDermott says Ms Hallam should pay off her debt and get a 0 per cent interest credit card. She can transfer her present balance to the card which usually has an interest-free period of six to nine months. When the interest-free period expires, and the usual rate of interest is applied, she should transfer the debt again to another card charging 0 per cent interest.

This can be done as often as she likes, and can be a valuable tool in reducing debt. The best rates on offer are Mint, offering 0 per cent interest for nine months, and Lloyds TSB offering 0 per cent for seven. That will lift a huge burden from Ms Hallam's shoulders and provide extra money each month.

PENSION

Mr McDermott says he would normally recommend a stakeholder pension, but it would not suit Ms Hallam's long-term goals. She would need to build a pot of at least £100,000 before retirement. At present annuity rates, £100,000 would buy her approximately £6,500 a year without the tax-free lump sum. Ms Hallam should invest in a mini-cash Isa instead.

Mr Breton says it is good news that Ms Hallam is a member of the Civil Service pension scheme. This is among the best available, with the pension linked to her final salary. Ms Hallam is probably making contributions to it as a condition of membership, and she may eventually have scope whilst there is scope to top up those contributions.

SAVINGS

Ms Storrow says the only way to save is to increase income and reduce expenditure. It is impossible for Ms Hallam at present. She should consider full-time work when her son is at school. Promotion is the only way her income will substantially improve.

Mr McDermott says Ms Hallam should consider putting a small amount each month into a high-interest savings account. If she has internet access, Coventry building society is offering 4.3 per cent interest on its NetSave Instant III account on deposits of £1 and above. ING Direct is offering interest at 4.3 per cent, and the account can be operated by phone or post.