Help us save £10,000 for our kids

Alexandra Smith, 42, is a self-employed bookkeeper living in Leeds with her husband Graham, also 42. The couple have two children, five-year-old Rosie and one-year-old Daniel.

After tax, Graham, a local government officer, brings home £28,807, while Alex earns £8,825 a year. The Smiths have a 5.8% fixed-rate mortgage with the Co-operative Bank and repay £723.35 a month. Their outstanding mortgage balance is approximately £110,000 and their home is worth around £300,000.

The couple have a total of £25,543 across seven savings accounts with various banks, several of which are earmarked for Rosie and Daniel's future. They also have an ISA each, with a combined total of £5,317.

Much of their savings come from a £45,000 inheritance received in 2008, followed more recently by an additional £10,000 inheritance. The Smiths have a child trust fund for each child with the Children's Mutual. Rosie has £1,059.91 in her CTF and Daniel has £443.71.

Alex and Graham have single life insurance policies with Legal & General. Alex pays a monthly premium of £9.60, while Graham has a monthly premium of £8.94.

Alex has a combined pension pot worth £15,779, but currently makes no contributions. Graham has a final salary pension scheme through work and contributes £233.85 towards it each month.

Alex says their main financial aim is to invest wisely for their own and their children's future without compromising their current lifestyle.

One of the Smiths' main objectives is to provide their children with the equivalent of £10,000 of today's money when they reach 18.

Francis Klonowski, an independent financial adviser at Klonowski & Co in Leeds, calculates: "With assumed inflation of 3.5%, £10,000 at 18 would mean £15,444 for Rosie and £17,583 for Daniel. If the Smiths maintain their current level of savings, the amount they set aside for each child would reach £33,728 and £36,850 respectively, assuming a cash growth rate of 3%."

He notes that the couple have been cautious in investing their inheritance up to now, as they didn't want to fall foul of the stockmarket's ups and downs. But they are now prepared to take more of a risk in return for higher growth.

Alex and Graham say they would prefer to invest in ethical funds, so Klonowski suggests they look at Triodos Bank, which is Dutch-owned but has a UK branch in Bristol.

"It offers a range of accounts to meet various ethical criteria, and its Young Saver account is worth considering for the children's deposits."

Klonowski advises them to take on additional risk gradually: "It's better to invest monthly rather than risking a large sum – so you buy units or shares in your chosen funds at different prices, and when there is a fall in value [of the units or shares] your monthly savings buy more."

The easiest way for the Smiths to gain access to the stockmarket is through stocks and shares ISAs. Until 6 April 2010, the ISA allowance is set at £7,200 each, of which £3,600 can be in cash. After 6 April, this will increase to £10,200 each, £5,100 of which can be put into a cash ISA.

"Alex and Graham should use their full cash ISA allowances," says Klonowski. "They shouldn't invest their present deposit accounts or their extra inheritance as there are a lot of potential demands for this money."

For example, the Smiths say they would like to do more work to their house and are likely to replace their car within the next three years.

Both Alex and Graham should also make wills at the earliest opportunity, according to Klonowski. Without a will, an individual's assets do not automatically go to their surviving spouse; they will be dealt with under the laws of intestacy as part of the deceased's estate.

"Even if the survivor eventually receives the assets, the process is longer and more complex than it would be with a valid, up-to-date will."

While both are covered by life insurance, neither of the Smiths have insurance to cover them if they fall ill.

Klonowski says: "They currently need both incomes to meet their normal outgoings, and if long-term illness forced either of them to stop working or reduce their earnings temporarily, they wouldn't be able to maintain their current standard of living or meet their plans for their children's future."

He suggests they set up income protection plans to provide the maximum cover – usually about 60% of their income. These should be written to age 60 and cover should commence after six months of illness.

This means that Alex and Graham will have to have a contingency fund in place to cover the first six months of reduced income, but deferring any payout will ensure premiums remain low.

They should also arrange a joint critical illness insurance policy to cover their outstanding mortgage.

The Smiths' mortgage is due to be reassessed in May this year. Klonowski says: "Rather than repay a large sum, they should use any surplus income to make larger monthly payments. They can hopefully arrange this through their new mortgage deal."

Under his final salary pension scheme, if Graham worked until 65 he would have a maximum pension of 40/80th of his final salary. If, however, he retired at 60, as he hopes to, he would get 35/80th, or £17,045 in today's money.

Klonowski says Graham should think about the penalties he will incur for taking the benefits before normal retirement age. Assuming 3% for each year, this would reduce his pension by 15% to £14,488.

His tax-free lump sum would also reduce – Klonowski estimates it would be £43,465.

However, he believes the Smiths can still accumulate enough for Graham to retire at 60: "From the age of 66 – when state pensions are paid – their total net income would be much higher than their expenditure, so the shortfall they will have to meet from their capital will only apply from ages 60 to 66."

Klonowski also advises Alex to move her combined pensions to a low-cost self-select pension plan, and use her business income to make regular contributions, starting at £100 a month.

The Smiths found Klonowski's advice very helpful. "It was painless but very thorough," says Alex. "He put a different spin on things. It's great to have someone looking at your finances from a more objective viewpoint."

Alexandra's To–Do List:

1. Write wills as soon as possible
2. Look into investment opportunities to suit increased appetite for risk
3. Set up income protection and critical illness insurance plans
4. Arrange a new mortgage deal with larger payments

Francis Klonowski is an independent financial adviser at Klonowski & Co in Leeds. Visit or call 0113 273 5255.