Personal finance: A problem shared...

Financial Makeover NAMES: EDMUND AND JUDITH HUGHES AGES: 31 AND 34 OCCUPATIONS: RESEARCH ENGINEER AND SENIOR NURSE

Edmund and Judith live in Hampshire and married last year. They are both employed, Edmund as a university research engineer and Judith as a senior nurse. Having got the savings for the wedding and new home out of the way, they now feel that they need to organise their personal finances.

They are particularly concerned about pension planning. Both of them are members of their employers' schemes: Judith has been in the National Health Service Pension Scheme since 1986 and Edmund joined the Universities Superannuation Scheme in December 1997. Their main worry is over Edmund's pension, as his current scheme is the only provision he has made.

The couple have some savings accounts scattered about, and each has a Tessa. They also have some shares; Judith has Halifax windfall shares, and Edmund holds some "blue chips". In addition to this, Judith has been paying into a low-cost endowment plan since 1989. They have a repayment mortgage, which is fixed for four years, and have taken out a joint level term life assurance to cover the loan. They save pounds 400 per month to fund home improvements and holidays, and would like to continue this if possible.

The adviser

Fiona Price of Fiona Price & Partners, 33 Great Queen Street, Covent Garden, London WC2B 5AA. Telephone 0171-430 0366.

The advice

For a newly married couple, Edmund and Judith's finances are in surprisingly good order. However, here are a few areas which need to be addressed.

As always, the first thing to look at is short-term savings. They need to build on the amount they currently have and should aim for at least three months' normal expenditure to cover any emergencies. Their savings are spread over three accounts and the rates on the First Direct high interest savings and Nationwide monthly savings account are not very competitive.

They should transfer the money in these accounts to the Nationwide Invest Direct account, which is paying 5.9 per cent gross (or they could consider Prudential's egg savings account, with a gross interest rate of 7.25 per cent, currently the best rate available, provided they are happy to put up with egg's administration problems).

As for the Tessas, Edmund's is with the Bradford & Bingley and I think that he should leave it there. Judith might want to consider moving her Halifax Tessa to get a better rate, as long as there are no penalties involved.

Investments: I would advise Judith to keep her low-cost endowment as it has been going for nine years. It suits her cautious attitude to risk and it would be inadvisable to surrender it, as it won't have made much, if any, profit. There could also be penalties on surrender.

Edmund should keep his shares, and I see little point in putting them into a PEP. It is a small shareholding and unlikely to give rise to a capital gains tax problem. And the income from PEPs will no longer be as tax-efficient, due to the reduction in tax credits on dividends. The cost of the PEP may outweigh the advantages here.

Protection: Further, Edmund and Judith see protection as a low priority. Both of their employers provide good levels of sickness benefit, so there is very little need for permanent health insurance (PHI) - especially for Judith. Their employers' schemes also have in-built death benefits which, together with the term assurance covering their mortgage, are more than adequate for their needs.

I would, however, suggest that they take out a critical illness plan, as extra protection for their home loan. This type of insurance pays out a lump sum in the event of contracting certain serious illnesses, and would give them some peace of mind if the unthinkable were to happen. A suitable plan, covering both lives for a sum assured of pounds 100,000, costs pounds 35 to pounds 40 a month.

Pensions: Edmund and Judith have said that their main concern is pensions. Edmund works on a contract basis and is less certain than Judith of his future career path. His aim is to retire at 65 on the maximum pension. This would mean that if he stayed with the Universities Superannuation Scheme (USS) he would have a shortfall in his target pension, equivalent to pounds 4,210 a year in today's terms. He can make up this shortfall by: buying "added years" within the scheme, making additional voluntary contributions to his employer's AVC scheme, or taking out a free standing AVC scheme.

Each one has its pros and cons. However, on balance an AVC scheme would probably be preferable to added years. Though a close run thing, on balance an AVC would suit Edmund's attitude to investment better in a favourable climate. The analysis I carried out showed that Edmund would have to pay pounds 77 per month, before tax relief, to achieve his objective.

Judith has been in the NHS Pensions Scheme since 1986. She originally joined the scheme in 1983, but was offered the opportunity by her employer to opt out after three years' service and take a return of contributions, which she decided to do. Though she later opted back in, it is a decision she now regrets.

She is anxious to make up the loss. Added to this, she would like to retire at the age of 55. Fortunately, as she was a member of her scheme before 1995, this is her scheme retirement age. It means that if she continues in service until the age of 55 she will have 34 years' service, and, because it is also her "normal retirement age", she can fund for the maximum pension (which is based on 40 years' service). Judith, like Edmund, has the same top up choices. After completing an analysis, I suggest that Judith buy added years. This will provide her with an inflation-proofed pension and is compatible with her very cautious attitude to risk.

My calculations show that Judith should be able to fund the additional cost of her pension using her spare cash. But she should write to the NHS Pensions Agency, giving her national insurance number, to get a breakdown of the cost.

Suggested Topics
PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Richard Norris in GQ
mediaGQ features photo shoot with man who underwent full face transplant
News
Gardai wait for the naked man, who had gone for a skinny dip in Belfast Lough
newsTwo skinny dippers threatened with inclusion on sex offenders’ register as naturists criminalised
News
Your picture is everything in the shallow world of online dating
i100
News
The Swiss Re tower or 'Gherkin' was at one time the UK’s most expensive office when German bank IVG and private equity firm Evans Randall bought it
news
Life and Style
Attractive women on the Internet: not a myth
techOkCupid boasts about Facebook-style experiments on users
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
Countries that don’t survey their tigers risk losing them altogether

Countries that don’t survey their tigers risk losing them

Jonathon Porritt sounds the alarm
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on