Wealth Check: 'Will our savings stretch to fund college?'
The Lormonts are keen their children have a comfortable stint in higher education, but their home needs a makeover
Sunday 08 July 2012
Saving for their family's future is the key concern for Michael and Sue Lormont, 46 and 47. The couple live with their son Nii, 16, and daughter, Elianah, eight, in Walthamstow, north-east London.
"We're worried about our financial security and getting our kids through college, and how best to save for them and us," says Sue. "At present we seem to run out of money at the end of the month, even though we're not big spenders. We don't own a car or go on many holidays."
Michael is senior manager for a recycling company while Sue is a part-time communications manager for an aid agency, and they earn a combined income of around £72,800. They have £27,250 set aside in savings, including £10,000 for kitchen repairs.
"We bank with the Co-operative Bank and Smile as they are ethical banks," she says. "But recently we've wondered whether it's worth putting our ISA savings into a credit union as our accounts are paying so little."
Their savings are made up of £16,100 in an individual savings account with Smile paying 0.5 per cent; £8,000 in a Triodos ISA paying 0.65 per cent; and £3,150 in National Savings & Investments premium bonds. "In general, how much should we be setting aside in savings in case one of us is made redundant?" says Sue.
They save £50 a month for their son, with a total of £3,200 in a Cooperative Bank Future Fund for his future, paying 0.25 per cent.
"We opened a Children's Mutual Child Trust Fund for our daughter," she says. "This has £1,100 in it, but we stopped contributing in 2009 by mistake – a slip of the computer mouse – and haven't restarted it as we thought it probably wasn't the best investment."
Michael and Sue pay £684 a month for their £117,000 mortgage with 19 years left to run on a fixed rate at 3.29 per cent with Halifax until January 2014. Their three-bed house, bought for £157,000 in 2002, is worth around £232,000.
Turning to retirement planning, Michael has a small £3,000 personal pension pot with Aviva that he is not currently paying into, while Sue has around £30,000 in a Friends Life personal pension set up 15 years ago.
"I stopped contributing to this in 2010 when I was made redundant and didn't start again as I never got round to it," she says.
"My new job won't allow me to pay into this pension. I'm only allowed to sign up to their scheme, which they would also pay into, so it would be sensible to join." However, she adds that as it's with Barclays she's not keen on this "for ethical reasons".
For protection purposes they pay about £21 a month into a joint life policy with Aviva, which would pay out £117,000 on either of their deaths to cover the mortgage.
Running out of money each month is easily done with two kids, a mortgage, saving and retirement planning to consider, say our panel of independent financial advisers. After funding home improvements Sue and Michael will be left with around £18,000 in savings which will need to be built up again. As a priority they should consider their pension planning.
Any taxable savings should be in Sue's name to avoid paying higher rate tax, and it is good that the family are making use of tax-efficient cash ISA allowances, says Danny Cox from IFA Hargreaves Lansdown.
He adds: "Credit unions offer a range of savings products including cash ISAs so they could combine their ethical aims by helping the community without sacrificing the tax-free nature of their savings. However, credit unions may not pay the best rates of return on their savings."
Ideally they should hold sufficient cash in savings to meet their normal monthly expenditure for three to six months, say the advisers.
Jaskarn Pawar from IFA Investor Profile suggests funding the home improvement costs out of the Premium Bond savings, and Sue's Smile ISA. "These are the two sets of savings with the lowest interest rate."
If they wish to consider a credit union, Mr Pawar suggests London Mutual Credit Union, paying 3 per cent on its cash ISA.
Michael and Sue have very modest pensions, and the advisers stress they need to attack their retirement planning as a priority.
Pensions aren't the only way of saving for retirement, but they do benefit from tax relief on contributions as well as tax-efficient growth. There are other options, such as ISAs and buy-to-let property.
Michael should ask his employer what plan is on offer to employees. Michael and Sue should recommence their pension contributions, agree the advisers. As a higher-rate taxpayer, Michael will also benefit from 40 per cent tax relief reducing the net cost of each £100 contribution to £60.
Sue is currently "wasting" free money by not joining her employer's pension scheme, stresses Mr Cox. "If Sue strongly objects to her employer's choice of pension provider she should take this up with them and ask if they will pay the contribution of 7.5 per cent of salary into a pension of her choice."
Saving for the children
Building up a pot of cash for kids, so they can have a deposit on a first property or fund part of their university costs is wise, says Alex Pegley from Chartered Financial Planner Calculis. However, he adds he's not a fan of Child Trust Funds or their successor, Junior ISAs, because the money becomes the child's at age 18. "Will a slug of cash at 18 be spent wisely or will they blow it on things that aren't sensible?" he says.
For their daughter, the CTF has a further 10 years before maturity and they should consider taking more investment risk than cash, adds Mr Cox. "The Children's Mutual CTF has an ethical fund option, which they might want to consider." They can save up to £3,600 a year into either a CTF or Junior ISA. Mr Pawar says they can open an adult cash ISA for their son's £3,200 with a credit union or as an ethical ISA.
Michael and Sue should review their insurance policies to ensure they have enough cover in the event of their deaths. At present, their life policy would only cover the mortgage. This should include a review of the benefits their employers may offer such as death in service.
Do you need a financial makeover? Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF firstname.lastname@example.org
Fuel poverty could kill 100,000 vulnerable people over the next 15 years, charity warns
Phoenix Life: Chance of a refund for overcharged policyholders has risen
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Simon Read: That's right, BT, they'd rather pay for a free service
Bank-beating exchange rates on your international payments
- 1 Forget 'The Dress': Here are five of the biggest news stories you might have missed
- 2 The black and blue dress: Makers considering a white and gold version
- 3 Prince Harry leaving the armed forced to pursue conservation projects in Africa
- 4 PornHub turns masturbation into energy in bid to save the planet
- 5 The remarkable archaeological underwater discovery that could open up a new chapter in the study of European and British prehistory
New theory could prove how life began and disprove God
Half of Ukip voters say they are prejudiced against people of other races
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
This is what it's like to be dead, according to a guy who died for a bit
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Aqsa Mahmood branded a 'disgrace' by her parents after claims she recruited three UK girls flying to Middle East
iJobs Money & Business
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads