Pension on hold, savings non-existent. Family seeks help to safeguard its future

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

The problem

The problem

The Tigwells' finances have suffered in the past few years as a result of the volatility of the stock market. They have an endowment policy which they took out to cover the £51,000 interest-only portion of their £110,000 Woolwich Open Plan mortgage (the remainder is repayment). But there is a strong likelihood of a shortfall when the policy matures.

The other problem is Frank Tigwell's with-profits personal pension with Standard Life. He took this out in 1988 but, disgusted at paying premiums of £3,500 a year, only to see his fund tumble by £6,000 in one year, he stopped contributing to his pension last year. But instead of saving this money elsewhere, the family has spent it.

The lack of financial planning could prove a problem in future. His wife Suzanne isn't paying into a pension and, with little in the way of savings, the family would struggle to get by if one of them had to stop work. Although they have life insurance (£125,000 for Frank, £177,000 for Suzanne) neither has income protection or critical illness cover.

Their home in Ripley, Surrey - bought in 1988 and today worth £280,000 - is the family's main asset. They remortgaged to an offset account with the Woolwich 18 months ago and pay 4.75 per cent interest (0.75 per cent above the base rate).

"The main thing is to pay the mortgage off - we hope to do so within six years," says Frank. "And then the children will be off to university and we'll be free from the mortgage noose."

The patients

Frank Tigwell (45), wife Suzanne (40) and their two daughters Jennifer (13) and Natasha (10).

Job: Both Frank and Suzanne are self-employed. Frank is a general building and maintenance engineer, Suzanne a reflexologist.

Combined income: £60,000+

Monthly outgoings: £2,500, along with a £1,200 mortgage repayment

Savings: None.

Investments: Frank has a Standard Life personal pension but has frozen the monthly payments; no individual savings accounts, shares portfolio or other investments.

Goal: To pay off their mortgage early.

The cure

Much needs to be done to get the Tigwells on the right track, says Philippa Gee, investments director at independent financial adviser (IFA) Torquil Clark. "Unless they take major steps now, they could fall into the trap of 'too little, too late'."

Mortgage

The Tigwells hope to pay off their mortgage early, but with an underperforming endowment policy, their current offset deal might not be the most suitable for them.

The first thing is to find out how much of a shortfall they could face on their endowment and then "make every attempt to plug that gap another way," advises Ms Gee. One option could be to move part of the interest-only portion of the mortgage over to capital repayment.

The second step is look at their offset mortgage because its flexible features - the ability to over- and underpay and better rates on savings - aren't particularly useful as they don't have much in the way of savings and aren't making overpayments.

"A more traditional fixed- or variable-rate mortgage would be better where the interest rate is lower," she says. They could then boost their savings.

Protection

Although their life cover helps, Ms Gee suggests topping it up to give extra protection.

Mark Dampier, head of research at IFA Hargreaves Lansdown, is also concerned as to how the family would cope if either parent were invalided out of work. He suggests critical illness cover.

Such cover comes at a price, however. "Frank is high risk because of his career, and at the age of 45, premiums will be expensive," he warns. A typical £100,000 worth of life and critical illness cover would cost about £92 a month.

Income protection is also worth considering. Frank could expect to pay £77.74 a month for a typical policy paying out £20,000 a year with UNUM, says Ms Gee, while Suzanne would pay £56.71 for £7,500 worth of annual cover from Scottish Provident.

Retirement

The couple must address their pension provision urgently. "The cost of delay is crippling: for every five years you delay your pension, you have to invest double to get the same sum at the end," says Ms Gee.

Mr Dampier advises Frank to start contributing to his pension again, to benefit from the generous tax relief. One option could be to transfer his Standard Life fund into a self-invested pension plan (Sipp).

Since he has a with-profits pension, Frank might suffer penalties for early surrender of his policy, so he should check before taking action.

Chris Mealing, director at IFA MDM Associates, says both Frank and Suzanne should consider starting a stakeholder pension to keep charges as low as possible.

Savings

The couple need to save up an emergency sum of money. Mr Dampier recommends they each open a mini cash individual savings account paying more than 4 per cent interest. Intelligent Finance, Safeway and Kent Reliance building society all offer these.

Once they've put by a few thousand for emergencies, they should build up their longer-term savings. Mr Dampier recommends an income fund such as Artemis.

If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email m.bien@independent.co.uk