Wealth Check: 'We want to save more for our
baby'
Published: 25 April 2004
This article appeared in The Independent
Save and Spend Supplement.
The problem
Samantha and Michael Diamond want to prepare for their baby Mia's
future but have little faith in the markets. They have been told
that their £60,000 endowment from Friends Provident, taken
out to back their former interest-only mortgage and costing them
£150 a month, could have a £20,000 shortfall when
it matures in 10 years. They are pursuing a mis-selling claim
against Friends Provident.
"We don't want our money to [be invested on] the stock market,"
says Samantha. "Apart from Mia, we want to pay off the mortgage.
We don't have any exotic plans for our finances, though another
property investment seems a good idea for the long term."
The couple have a £94,000 mortgage with Norwich & Peterborough
on their £200,000 home. This is made up of a basic loan
(£76,000) and a further advance of £18,000 - both
fixed at 5.59 per cent until February 2009. The couple have savings
of £5,000 offset against the main loan, while the monthly
repayments on the further advance come out of Samantha's current
account; she makes overpayments when she can.
The mortgage is covered by a life assurance policy from Barclays,
with which Michael also has a personal pension (he's paid £200
a month into this since 2000) and income protection and critical
illness cover. But he is concerned that these products don't offer
value for money. Barclays has even suggested he stop paying into
the pension scheme because of poor performance, so he is unsure
of his next step.
Michael has a second pension with Friends Provident: he has invested
several thousand pounds in this over the past 10 years.
Samantha has income protection and critical illness cover with
Unum and is a member of her employer's final salary pension scheme,
in which she has saved 5 per cent of her salary since 1989. She
is concerned that the value of her pension fund might be affected
by her decision to return to work from maternity leave on a part-time
basis.
The couple put £50 a month into a National Savings and
Invest- ments (NS&I) children's bond for Mia, and Samantha
also has several hundred pounds in a Yorkshire Bank savings account.
Their only debt is £2,000 on a Marks & Spencer credit
card to take advantage of its 0 per cent introductory deal.
Interview by Sam Dunn
The patients
Samantha, 36, and Michael Diamond, 35, from Rothwell, Northants.
The couple have a four-month-old baby, Mia.
Jobs: Samantha is a trading standards officer for Northampton
county council; Michael is a director of a small engineering company.
Joint income: £55,000 (before Samantha went on maternity
leave).
Savings/investments: £5,000 with Norwich & Peterborough,
offset against their mortgage; £50 a month into a children's
bond; several hundred pounds in a Yorkshire Bank account; a Friends
Provident endowment.
Debt: £2,000 on a credit card.
Goal: To provide for baby Mia's future and pay off the mortgage.
The cure
The Diamonds need to overcome their fear of equities, says Ben
Yearsley, investment manager at independent financial adviser
(IFA) Hargreaves Lansdown. "Investors have lost money [on
the stock market] in the past four years, but that doesn't mean
you can't make money in the future."
Before they invest in more property, they should build up their
savings, says Greg Koiston at IFA Paul Gregory.
David Higgins, director at IFA Glazers, suggests they consider
surrendering their endowment and using the funds for an overpayment
on their mortgage now.
They should remember, too, to clear the debt on their credit
card before they start being charged interest.
Savings
The couple have chosen well with their NS&I bond, says Mr
Koiston, as it pays 4.15 per cent interest. And Mr Higgins suggests
taking out a mini cash individual savings account (ISA) with Abbey,
currently paying 4.6 per cent, to boost their savings further.
Mr Yearsley believes an equity ISA such as Cazenove's UK Income
& Growth could be a better bet than NS&I.
Property
Their fixed-rate deal could be beneficial if the base rate rises,
says Mr Higgins, but he warns offset mortgages are rarely the
most competitive. He thinks the couple should shop around for
a better fixed-rate mortgage - and put their savings in an account
paying the highest interest they can find.
However, they would face hefty redemption penalties if they made
any changes now, says Mr Koiston, as they took the deal out fairly
recently. Instead, they should put as much "rainy day"
money into their N&P offset account as they can, suggests
Mr Yearsley, and look to remortgage later.
Protection
With a mortgage and young family, the Diamonds need "almost
as many protection products as they can afford", says Mr
Yearsley.
Michael should start by asking Barclays for a statement on what
exactly he is paying each month, says Mr Higgins. He should then
look round for a better deal. For £200,000 life and critical
illness cover over 25 years, adds Mr Yearsley, Michael would pay
£88.13 a month with Friends Provident. Income protection
of £13,750 a year each would cost £38.84 for Samantha
with Scottish Provident and £48.41 for Michael with Friends
Provident.
Retirement
The effects on her pension of Samantha's decision to work part-time
will depend partly on the details of her scheme, but Mr Higgins
says she could consider buying extra years' contributions to boost
its value at a later date.
A self-invested personal pension (Sipp) could be the answer for
Michael, says Mr Yearsley, but only after checking for transfer
penalties from previous pension pots.
