Little ways to make large gains

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Nicola Potts is 35 and has been running her own business as a freelance writer and marketing consultant for the past five years. She earns between pounds 20,000 and pounds 25,000 a year. She is unmarried but her boyfriend lives with her in Hayling Island, near Portsmouth. Nicola is seven years into a pounds 40,000 repayment mortgage, the outstanding balance being about pounds 35,000.

She describes herself as having "accumulated one of everything through fleeting encounters with different financial advisers", including a pounds 100-a-month investment trust PEP with John Govett Investment Management, a pounds 26-a-month personal pension with Scottish Equitable, and an income protection policy that pays out pounds 500 a month - roughly her basic outgoings - after 13 weeks of her being unable to work. She also has some pounds 2,000 in various building societies.

Nicola wonders if she has her financial priorities right. She'd also like advice on a short-term investment vehicle to put money aside for tax.

What a financial adviser recommends:

Nicola has all the right sort of financial products for someone of her age and circumstances, and what she should now look at is increasing the value she gets from her financial affairs.

She would like to repay her mortgage early, perhaps by increasing her monthly payments. Before she does this she should ask her lender about how it does its mortgage interest calculations - she may find that additional monthly payments are only taken into account at the end of the year, in which case it might be better to save the extra money in an interest-bearing account in the meantime and hand it over at the year-end.

Nicola has pounds 2,000 in a range of building societies that would cover her basic outgoings for a few months if work dried up or she was ill. She also has an income protection policy (also known as permanent health insurance) in the event of ill-health, but should consider increasing the pounds 500 a month of cover. She might also consider a critical illness policy, which would pay out a lump sum to clear her entire mortgage in one go if she became very ill.

Nicola says she would like to retire on about half the equivalent of her present income. She has been paying into a pension for five years but her present premium of pounds 26 a month is not nearly enough to achieve the goal of a comfortable retirement. In her case, the best way of upping the value of her pension is to pay in lump sums late each tax year when she has an indication of her likely taxable profit.

In addition to a basic income, she could also look at insuring her pension contributions against long-term ill-health. A contribution protection policy will cover the premiums typically from six months after she becomes ill right up until retirement.

Nicola has not been overly-impressed with the performance of her PEP savings. She has been paying pounds 100 a month to the same investment manager for three years and the money has been invested for growth in Asia and Europe. Nicola's policy of saving a little regularly is a good one but she should remember that investing in stockmarkets should be done on a five year-plus view. That said, there is nothing to stop her from switching managers every tax year. It may be worth choosing a different PEP for next year.

Finally, Nicola should make a will. Nicola likes her financial independence and has no plans to get married or have children. And while she may consider buying a property with her boyfriend at a later date at present he lives in her house. If she were to die without a will he would have no rights over her home or the rest of her estate.

q Editor's note: premium bonds are a well-used savings product for people who want to put money aside for a known tax bill payable in the future. They pay no interest as such, but your bonds go into a draw every month for a range of tax-free cash prizes ranging from pounds 50 to the pounds 1m jackpot. Average winnings amount to 4.75 per cent of the value of your bonds, which you can buy in multiples of pounds 100 from the Post Office.

q Nicola Potts was talking to David Lewis of EFS Financial Management, an Isle of Man-based independent financial adviser and a member of DBS, a leading network of IFAs.

If you would like to be considered for a financial makeover for publication, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL. Fax: 0171-293-2096 or 2098; e-mail: Please include details of your current financial situation, a daytime telephone number, and state why you think you need a makeover.