Protecting yourself from the unforeseen
Patrick Henry, 32, is a process controller for United Utilities. He lives in Northwich, Cheshire, with his wife Helen, 33, who is a teacher.
The couple married in July 2009 and are in the process of moving house and arranging a new mortgage with Barclays, their existing lender.
The mortgage total will be £153,995 over a term of 13 and a half years, with an interest rate of 0.74% above the base rate, and monthly repayments will be £1,038.75.
Patrick's monthly earnings after tax are £1,900, while Helen takes home £1,850 a month. They both have final salary pension schemes with their current employers. Patrick contributes 5% monthly and Helen 6.4% monthly.
Helen has £5,000 outstanding on a student loan but the couple has no other debts. They have £15,000 in an offset mortgage account with Barclays and £5,000 in an instant access account with Yorkshire Building Society, with an interest rate of 2.1%.
Patrick has a stocks and shares individual savings account with Legal & General currently worth £1,256.12 into which he makes regular payments of £50 a month.
Presently, neither of them have any life or health cover. Their priority is to ensure they can cover outgoings should any unforeseen circumstances occur. Patrick says: "This is an important time in our lives and we want to get the best advice possible."
The first thing Helen Tandy, independent financial adviser for The Gaeia Partnership in Manchester, looked at was Patrick and Helen's mortgage.
"Patrick arranged his previous mortgage when he was single and felt it was not an area he needed to protect," says Tandy. "When he married he did not review this as he had only a small balance remaining."
The couple hope to complete on their new mortgage in the next month, so Tandy recommends that, as they hope to start a family this year, they look into insurance protection as soon as possible.
"With Patrick's current mortgage they have been able to overpay and so reduce the balance substantially. They do not expect this will be the case on the new mortgage in the short term due to their plans to start a family," she says.
Helen has decided she will return to full-time teaching at the end of any maternity leave she takes, and when arranging their new mortgage the couple took into account any reduction of income they may receive during a period of maternity leave.
However, Patrick and Helen want to ensure the mortgage would be repaid in the event of either of them suffering a critical illness or if either one dies. Both have death in service cover through their employer.
In the event of death, Patrick's employer would pay out four years' salary and Helen's would pay out three and a half years.
Tandy also recommends they look at additional protection in case they change jobs. Since they have arranged a mortgage term of 13 and a half years, Tandy says they should get cover for a 14-year period.
Their monthly premium will depend on whether they want the payout to decrease over time (along with their mortgage total) or to remain at the same level throughout.
On a decreasing basis, Tandy says they could get a 14-year joint life first death insurance policy, including critical illness insurance, for approximately £39.17 a month.
Alternatively, level term assurance cover for the same period will cost about £59.40 a month.
Tandy notes that when it comes to complex protection products such as critical illness insurance, customers shouldn't just opt for the cheapest provider.
"You may find these providers do so on the basis of only very clean applications [in other words someone with a squeaky clean health record], they then heavily underwrite them for those who have health problems.
This leads to higher ending prices than those which could be obtained from a provider that does not look as competitive."
In terms of income protection insurance, Patrick is covered through his employer for six months' full pay and six months' half pay. "But he is concerned about how they would manage after this time," says Tandy.
Helen is unsure about the amount of protection she has through her employer so Tandy says she should check this as soon as possible.
The couple have agreed they need enough income protection to cover outgoings of this amount each month.
Tandy suggests they get an income protection insurance plan that would pay out this amount and cover up to the retirement age of 65.
She warns that teachers are heavily rated due to the potential for stress within the job and for this reason she estimates the cover for Helen would be a bit more expensive than someone in a job considered as more 'low risk'.
However, the couples' monthly premium can be made cheaper by prolonging the time between making a claim and receiving a payout – something which should only be looked at if you've got enough savings to cover the in-between period.
For a deferred period of 12 months and paying for sickness to age 65, Helen would be paying £34.55 a month. For Patrick's plan, Tandy says she would need more details of what his job entails to ensure her rating for him is correct.
The couple both have final salary pension schemes with their employers. Patrick's scheme is based on 1/60th basis retirement age of 65 and he expects to retire from this scheme with nearly a full pension.
He also has a small pension pot with Sun Life, which he has previously looked at transferring into his employer's scheme.
Helen is a member of the teachers' superannuation scheme and would currently fall a few years short of receiving a full pension from this scheme.
"She doesn't wish to consider any extra contributions to the scheme at the present time but appreciates she may want to review this in the future," says Tandy.
Helen also has £1,300 in an AEGON personal pension plan, and again Tandy suggests she contact her employer's pension provider and transfers it across.
Finally, Tandy notes that Patrick and Helen do not have wills in place. "They should both draft a will as soon as possible and review and update in line with their changing financial situation," she concludes.
Patrick felt the meeting with Tandy reinforced everything they needed advice on: "The protection side, which we were most concerned about, was covered very thoroughly."
Helen Tandy is an independent financial adviser for The Gaeia Partnership, based in Manchester. Visit gaeia.co.uk or call 0161 434 4681.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
Personal pension plan
A money purchase (defined contribution) pension that the holder can make contributions to if the company they work for does not provide an occupational or final salary scheme they can join or they are self-employed. PPP contributions qualify for tax relief.
Term assurance provides cover for a fixed term with the sum assured payable only on death. Term assurance premiums are based primarily on the age and health of the life assured, the sum assured and the policy term. The older the life assured or the longer the policy term, the higher the premium will generally be. There are generally two types of term assurance. Level term assurance premiums are fixed for the duration of the insurance term and a payment will only be made if a death occurs during the insurance period and with decreasing term assurance, life cover decreases during the insurance term reducing the cash payout the longer the term runs and this is reflected in the premium.
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.