Personal finance: Financial Makeover - Carving out a future

Paul and Nina first moved to their present home in Cambridge 21 years ago. In 1984 they were able to buy it under a right-to-buy scheme. They originally payed pounds 24,000 for the house, but after making substantial improvements, it is now worth about pounds 140,000.

They have increased their borrowing over the years and they currently have an outstanding mortgage of pounds 69,000. They have a Scottish Widows endowment policy for pounds 78,500 which is due to mature in 2022. Apart from this Paul and Nina have very little savings or investments. They have two children: Emma is 21 and Ben is 12. They generally have around pounds 200 in surplus income every month. Nina works part-time, and most of their income comes from Paul's cabinet-making business.

The adviser: Thomas McPhail is pensions development manager for independent financial advisers Torquil Clark plc, St Marks, Chapel Ash, Wolverhampton, WV3 0TZ, (01902 576778).

The advice: The good news is that there is still time to take action, but only just. There are several issues that need to be addressed - the biggest is the mortgage which was originally taken out in 1984 with a term of 25 years.

Unfortunately Paul and Nina had to cash in their endowment policy and only restarted saving with their Scottish Widows policy 2 years ago. Endowment policies tend to be good value only if held to maturity, and most of the small print is, not surprisingly in the insurance company's favour. In order to ensure that they have the necessary capital to repay the mortgage when it is due, they will have to either increase their savings substantially or defer the repayment of their mortgage.

The current endowment policy has a monthly contribution of pounds 143. If they want to repay the mortgage on it's original maturity date of 2009 they will need to increase their monthly savings to around pounds 450 per month. After a very brief discussion, this option was rejected.

The alternative is to ask their lender, Abbey National, if it would be possible to extend the term of their mortgage to coincide with the maturity date of their endowment policy. This would avoid an increase in costs now, but they would have to pay interest on the outstanding mortgage for an extra 13 years.

Given the nature of their occupations, and their fluctuating incomes, Paul and Nina should look to build up a cash reserve to cover short-term financial emergencies. Ideally they should have enough cash to cover expenditure requirements for at least three months. They can set up a direct debit from their current account to feed into a deposit account, a cash ISA would be suitable for this purpose and has interest credited without any tax being deducted.

Apart from their endowment policy, Paul and Nina have very little in the way of insurance to cover illness, injury or death, so the loss of Paul's income would have serious consequences, particularly while Ben is still financially dependent on them.

Insuring against these possibilities to the maximum would be prohibitively expensive, but modest levels of cover can make a big difference. A CGU Family Income Benefit policy would, for a cost of under pounds 17 per month, provide an income of pounds 200 a week in the event of death during the next eight years. Paul can use a PHI policy to insure against the possibility of being temporarily unable to work through illness - for him, cover of pounds 700 per month would cost around pounds 35 per month.

A critical-illness policy which pays out on diagnosis of severe medical conditions such as heart disease, cancer or a stoke would cost Paul and Nina around pounds 65 per month for cover of pounds 69,000, which would be enough to pay off the mortgage.

Paul and Nina's pension planning has been limited to date. Paul paid contributions to a Hill Samuel self-employed personal pension for a couple of years, but is not currently putting in any money. Paul and Nina have been self-employed for most of their working lives, and as such will only be entitled to the basic state pension for a married couple, just pounds 106.70 per week in this tax year.

Their only other source of income in retirement would be to sell their house to release the equity. Any additional action they can take now will reduce pressures in later years, so Paul should look at restarting his pension contributions immediately. He has already paid the starting costs on his existing pension so it is better to use that one than to start another.

A contribution of pounds 50 per month gross (pounds 38.50 net) could produce a pension of around pounds 4,000 per annum at Paul's 65th birthday. This is a good start and can be increased as time goes by. Where possible, increases to existing pensions should be made via a discount broker to reduce costs. If possible in the future, they should also try to make some pension contributions in Nina's name, since she will be able to draw a tax-free income in retirement up to the level of the personal allowance.

One further option would be for Paul to employ Nina, either now or at some point in the future, to help with his business. By paying her a salary of a few thousand pounds per year they may be able to reduce the household tax liability, and help with pension planning.