Wealth Check: 'We want to save more for our baby'

Each week we give 'Independent on Sunday' readers a financial makeover

The problem

Samantha and Michael Diamond want to prepare for their baby Mia's future but have little faith in the markets. They have been told that their £60,000 endowment from Friends Provident, taken out to back their former interest-only mortgage and costing them £150 a month, could have a £20,000 shortfall when it matures in 10 years. They are pursuing a mis-selling claim against Friends Provident.

"We don't want our money to [be invested on] the stock market," says Samantha. "Apart from Mia, we want to pay off the mortgage. We don't have any exotic plans for our finances, though another property investment seems a good idea for the long term."

The couple have a £94,000 mortgage with Norwich & Peterborough on their £200,000 home. This is made up of a basic loan (£76,000) and a further advance of £18,000 - both fixed at 5.59 per cent until February 2009. The couple have savings of £5,000 offset against the main loan, while the monthly repayments on the further advance come out of Samantha's current account; she makes overpayments when she can.

The mortgage is covered by a life assurance policy from Barclays, with which Michael also has a personal pension (he's paid £200 a month into this since 2000) and income protection and critical illness cover. But he is concerned that these products don't offer value for money. Barclays has even suggested he stop paying into the pension scheme because of poor performance, so he is unsure of his next step.

Michael has a second pension with Friends Provident: he has invested several thousand pounds in this over the past 10 years.

Samantha has income protection and critical illness cover with Unum and is a member of her employer's final salary pension scheme, in which she has saved 5 per cent of her salary since 1989. She is concerned that the value of her pension fund might be affected by her decision to return to work from maternity leave on a part-time basis.

The couple put £50 a month into a National Savings and Invest- ments (NS&I) children's bond for Mia, and Samantha also has several hundred pounds in a Yorkshire Bank savings account.

Their only debt is £2,000 on a Marks & Spencer credit card to take advantage of its 0 per cent introductory deal.

Interview by Sam Dunn

The patients

Samantha, 36, and Michael Diamond, 35, from Rothwell, Northants. The couple have a four-month-old baby, Mia.

Jobs: Samantha is a trading standards officer for Northampton county council; Michael is a director of a small engineering company.

Joint income: £55,000 (before Samantha went on maternity leave).

Savings/investments: £5,000 with Norwich & Peterborough, offset against their mortgage; £50 a month into a children's bond; several hundred pounds in a Yorkshire Bank account; a Friends Provident endowment.

Debt: £2,000 on a credit card.

Goal: To provide for baby Mia's future and pay off the mortgage.

The cure

The Diamonds need to overcome their fear of equities, says Ben Yearsley, investment manager at independent financial adviser (IFA) Hargreaves Lansdown. "Investors have lost money [on the stock market] in the past four years, but that doesn't mean you can't make money in the future."

Before they invest in more property, they should build up their savings, says Greg Koiston at IFA Paul Gregory.

David Higgins, director at IFA Glazers, suggests they consider surrendering their endowment and using the funds for an overpayment on their mortgage now.

They should remember, too, to clear the debt on their credit card before they start being charged interest.

Savings

The couple have chosen well with their NS&I bond, says Mr Koiston, as it pays 4.15 per cent interest. And Mr Higgins suggests taking out a mini cash individual savings account (ISA) with Abbey, currently paying 4.6 per cent, to boost their savings further.

Mr Yearsley believes an equity ISA such as Cazenove's UK Income & Growth could be a better bet than NS&I.

Property

Their fixed-rate deal could be beneficial if the base rate rises, says Mr Higgins, but he warns offset mortgages are rarely the most competitive. He thinks the couple should shop around for a better fixed-rate mortgage - and put their savings in an account paying the highest interest they can find.

However, they would face hefty redemption penalties if they made any changes now, says Mr Koiston, as they took the deal out fairly recently. Instead, they should put as much "rainy day" money into their N&P offset account as they can, suggests Mr Yearsley, and look to remortgage later.

Protection

With a mortgage and young family, the Diamonds need "almost as many protection products as they can afford", says Mr Yearsley.

Michael should start by asking Barclays for a statement on what exactly he is paying each month, says Mr Higgins. He should then look round for a better deal. For £200,000 life and critical illness cover over 25 years, adds Mr Yearsley, Michael would pay £88.13 a month with Friends Provident. Income protection of £13,750 a year each would cost £38.84 for Samantha with Scottish Provident and £48.41 for Michael with Friends Provident.

Retirement

The effects on her pension of Samantha's decision to work part-time will depend partly on the details of her scheme, but Mr Higgins says she could consider buying extra years' contributions to boost its value at a later date.

A self-invested personal pension (Sipp) could be the answer for Michael, says Mr Yearsley, but only after checking for transfer penalties from previous pension pots.