Safeguard your home during the crunch
Vicki Bromley, 27, is an office administrator. She lives in Reading with her husband Mark, 32, who is an IT technician. Their combined income after tax is £38,400, approximately £3,200 a month.
At the moment, the couple have an Abbey mortgage on 40% of their home and they rent the other 60% from a housing association. In total, they spend £843 on housing each month.
Vicki has savings of £2,500 in an Abbey instant access eSaver account, while Mark has £6,000 in a Santander shareholder reward account.
They have a joint life insurance policy with LV= that covers each of them for £82,000, and the monthly premium is £7.95. Both have AXA personal pensions – Mark's is worth £13,500 and Vicki's is worth £8,000.
"We want to ensure the security of our home during a period of unsettled income, and we have concerns regarding the amount and usage of any emergency fund we have. We also want to look at our pension provisions," says Vicki.
Stuart Millar, an independent financial adviser from Finch Financial Services in Woodley, says the most important thing for Vicki and Mark is that they have emerged from this turbulent time with jobs.
Since their marriage at the start of the year, the couple have had a tough time. First Vicki faced redundancy and then Mark was made redundant from his job in IT.
Vicki successfully applied for another role within her firm and Mark managed to get contract work over the summer while he applied for longer-term positions.
But the sudden change in their circumstances has left the couple shaken and they want to ensure their finances are in the best shape possible, providing a buffer against any similar situations in the future.
Millar thinks their immediate priority should be to build up a rainy day savings pot. "Usually I would be looking for clients to have up to six months' earnings in cash as a reserve fund," he explains. "This is particularly the case here as both Vicki and Mark are in new jobs and under probationary periods."
In the first three months of a new job, employees are especially vulnerable since employment protection legislation does not cover them against instant dismissal, or provide them with benefits associated with longer service (redundancy packages, pension provision and life cover for example).
Millar says the Bromleys should arm themselves against this by increasing their emergency fund. This will also give them more flexibility in the future and could be particularly useful for paying off a lump sum of their mortgage.
Currently, Vicki has £2,500 in a savings account. She used to have an ISA but moved the majority of her balance into Mark's Santander savings account because of the higher interest rate it paid.
Unfortunately, the rate on this account drops after any withdrawals and reduces to 0% if it is dipped into more than once in a year.
The new cash ISA limit of £5,100 will be available to under-50s from April. Millar advises that the Bromleys take full advantage of the increase to maximise their tax-free savings.
At the moment, Vicki and Mark share ownership of their property – a housing association owns 60% – with the option to fully own at a later date. On the 40% they own, the couple have a 3.9% fixed mortgage with Abbey, which is due to end in two years.
Millar points out this may be just as interest rates are rising out of the recession. "It would be prudent for Vicki and Mark to assume higher costs will apply and to begin to plan for this now," he says.
Rather than bumping up their monthly repayments to reduce their mortgage now – an action that could leave them short on emergency cash funds – they should continue saving for the next couple of years and potentially pay off a much larger chunk when the time comes to renew their mortgage deal.
The rent the Bromleys pay on the housing association share of their home is due to double in six years' time and this is another factor to be taken into consideration.
Originally, Vicki and Mark assumed the best thing would be to pay off as much of their mortgage as possible and then to deal with the rent increase as it happened, potentially through buying a larger stake in their home.
Millar warns against this: "With interest rates so low at the moment, they can only go one way and that is up." The Bromleys don't want to face the situation where their mortgage repayments double and they have nothing put away to deal with the hike.
Since the mortgage will be reassessed in two years, it takes short-term priority over their future rent increase.
Vicki and Mark should also be aware that since they bought their house two years ago, the market value is likely to have decreased. So, the equity provided by their home is significantly lower than before.
If the market improves, and once Mark and Vicki have held their jobs for longer than a year, Millar reasons they can think about reducing their emergency fund once more.
Vicki's current employer is switching to a different pension provider. So, she should assess whether it's better to keep her current pot where it is, as transferring can incur charges and may offer her a less attractive choice of funds.
Since leaving his former employer, Mark has stopped contributing to his pension pot. Once he's through the probationary period with his new employers, it's important for him to reassess his pension options and sign up to any company scheme offered.
Avoid this common pension mistakes
"Both Vicki and Mark should also consider the asset allocation in their pensions to ensure they match their current attitude to risk," says Millar.
He adds that in the future, if the couple feel more comfortable with their financial situation and have a good amount of cash saved in ISAs, they might want to consider late funding their pensions to gain tax relief benefits.
"Vicki and Mark have sufficient life cover to cover the mortgage in the event of death and also have some critical illness insurance cover," Millar says. But again he recommends a review at the end of their probationary period when full employee benefits are offered, such as death in service.
Vicki found Millar's advice very helpful: "He was good at highlighting issues we'd not thought about. We can't instantly implement it all, but it's a complete change of mindset."
Vicki & Mark's To–Do List:
- Increase emergency cash reserve
- Consider ISAs as a savings vehicle
- Reassess mortgage options – potentially pay off lump sum
- Sort out pension arrangements
- Review life insurance, including employee benefits
Report edited by Esther Armstrong. Stuart Millar is a chartered financial planner at Finch Financial Services in Woodley, Reading. Contact via email email@example.com or call 0118 969 8855
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.
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.