Money makeover: "We want to provide financial security for our young family"
Tim and Caroline have three young children. They have just bought a house and want to put together a long-term plan to make sure their family is financially secure.
Tm Saunders, 39, and his 41-year-old wife Caroline (pictured below) have moved from a mid- terrace house on a busy main road in Southampton to a detached property in a quieter area on the outskirts of the city.
They are keen to undergo a money makeover at this time of change to ensure they are financially secure and continue to provide the best possible life for their three children (pictured below): Harriett, five, Heidi, three, and Henry, six months.
The couple run their own public relations firm from home, Creativecoverage.co.uk, which helps artists get media coverage and as organise exhibitions. Prior to setting their business up in 2013, Tim worked as a journalist, while Caroline – the self-confessed “creative one” – was an art teacher.
In their spare time they enjoy taking their young family to visit parts of the UK, and they hope to take the children abroad in future. However, they live frugally, don’t have a TV and drive a 14-year-old car.
Tim and Caroline feel they are good at saving, but they’re keen to review their finances in light of their recent move.
Key recommendations for Tim and Caroline:
- Increase their mortgage payments to repay their mortgage early.
- Save into cash individual savings accounts (Isas) using the annual allowance of up to £15,240 per person.
- Start making pension contributions.
- Take out cover to ensure their income isn’t affected if either of them is unable to work or dies.
Tim, Caroline, Harriet, Heidi and Henry relax outside their family home.
This is where Tamsin Caine (pictured below), a chartered and certified financial planner with Smart Financial in Cheshire, steps in.
She offers a lifestyle financial planning service and specialises in working with business owners.
She has made the key recommendations above for the family. She explains: Tim and Caroline together earned £33,700 in the past year, generated from their business, freelance work and rental income from a property they own outright. The couple’s biggest outgoing is the mortgage on their home, which costs £5,200 a year.
The next biggest spend is £4,800 a year on housekeeping. However, once all their outgoings have been taken into account – including everything from utility bills to shopping, eating out and even charity donations – the couple have about £18,000 spare each year. They have £17,000 in savings before interest and tax is taken into account (excluding pensions).
Increase mortgage repayments
Tim and Caroline are able to make early repayments on their Santander mortgage without being charged a fee, so I suggest they pay an additional £200 a month, or £2,400 a year. This will reduce the term of the mortgage by 10 years. Some lenders allow early repayments without charging a fee, but some might cap this at a monthly amount, while others could limit the annual lump sum.
If the couple’s lender did apply early repayment charges, I would encourage Tim and Caroline to instead put the additional money into an Isa and then make a lump sum repayment on their mortgage once the period of early repayment charges had ended.
Tim says: “We intend to overpay our mortgage, although given current forecasts that interest rates might drop due to Brexit, we will be careful about when we make these overpayments so that we enjoy the maximum period of low interest rates.
Despite this year’s launch of the new £1,000 tax-free savings allowance, I suggest Tim and Caroline move the £17,000 they have in savings accounts into a tax-free Isa and then top it up with any additional money they have left over at the end of each month.
A cash Isa is preferable for Tim and Caroline because of their low appetite for risk, which means a stocks and shares Isa might not be the best option for them.
I would encourage an even cash split between products with different terms – for example, a three- year fixed rate, a one-year fix and an easy-access account – so that money is available at different times, if required. You can typically only open one new cash Isa per person each year for new money.
Top cash Isa rates often don’t last long, so it’s best that Tim and Caroline snap one up quickly if they find an attractive deal. Banks and building societies offer different methods for managing Isa accounts, so they need to pick an account that offers the right method for them – whether that’s branch, phone, internet or postal.
Tim says: “Gone are the days of taking risky investments. Now that we have a family, we are purely looking for low-risk opportunities. Isas seem to be the only low-risk option for savings, but their low interest rates are unattractive. Of course, we will have to pay any residue into one, but begrudgingly.”
Plan for retirement
Tim and Caroline have several pension pots from past employment between them to the value of about £30,000. But I suggest the pair invest £500 a month into two pensions, so that they each have their own savings in retirement.
The next steps would be to check if Tim’s current pension is still suitable for contributions and look at the investment choices available. If it’s unsuitable, I suggest he takes out a low-cost pension plan based on a range of passive investment funds, such as those offered by Nucleus or Fidelity.
We have been unable to complete a risk profile for Tim and Caroline, because they are moving house, but I feel they will probably have a relatively low appetite for risk and a minimal need for taking traditional risk. I would therefore suggest they invest in a combination of global bonds and equities, with a low percentage of equities.
Tim asked whether there is an alternative to paying into a pension, as he is worried about the charges some funds apply. While there are many alternatives to a pension, this is the most suitable option.
No access is required to these funds, as far as I know, before retirement age, so they will benefit from immediate tax relief of 20%, which is not available through any other savings plan. The other point to make is that pension funds do not always have high charges. It is not the case across the board.
Tim says: “I asked if Caroline could contribute towards her generous teachers’ pension. However, Tamsin says this isn’t an option, as Caroline is no longer a teacher.”
Protect the family
Tim (pictured below unpacking at his new house) and Caroline have joint life insurance for the term of their mortgage costing £13 a month. But I suggest they each buy a level-term policy for the remaining term and amount of the mortgage, which is £107,000 over 27 years. A level-term policy pays out a lump sum if you die within the specified term. The amount you’re covered for remains level throughout the term – hence the name. Level-term cover does not decrease in line with the mortgage being repaid, and if one person dies and their plan pays out, the other person’s policy remains in force.
I recommend that these policies be written in trust by the insurer. This is like setting up a trust. However, because the insurer’s trusts are used, there is no requirement for an external solicitor and their associated costs.
Doing this will ensure funds are immediately available should one of the couple die, negating the need to wait for probate – where you apply for the legal right to deal with someone’s estate when they die. It also has the benefit that the proceeds of the policy are held outside the estate and will not be subject to inheritance tax.
Income protection to cover 50% of Tim’s average income over the past three years should be purchased to cover his working life until retirement.
This will provide a tax-free monthly income if Tim is unable to work because of an accident or long-term sickness, and enable the family to maintain their lifestyle and continue to make pension contributions.
Tim says: “We will investigate income protection, because it gives peace of mind in precarious circumstances. Once the dust has settled on our move, we will review our wills and look for cost-effective ways to ensure our family inherits what we leave them.”
- None of the above should be regarded as advice. It is general information based on a financial report conducted by Tamsin Caine, a chartered and certified financial planner with Smart Financial in Cheshire.
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The process of applying for the right to deal with a deceased person’s estate. If a person has left a will, they will usually have appointed a will executor. The executor then has to apply for a ‘grant of probate’ from the probate registry, which is a legal document that confirms the executor has the authority to deal with the affairs of the deceased. If a person dies without making a will, intestacy law applies (see intestate).
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.