Achieve a better work/life balance

Adey Adeneye is a 43-year-old social worker, who lives with her eight-year-old daughter in Southsea, Hampshire. She currently works four days a week, taking home around £2,000 a month.

She has a final salary pension with her employer, Portsmouth City Council, and a life insurance and critical illness insurance policy with Norwich Union – she pays £10.29 a month for it and it’s worth £68,000.

Adey is paying £780 a month on a £250,000 Halifax repayment mortgage. She has a Barclays cashback credit card and American Express credit card, with £250 and £800 to pay back, respectively.

In addition to these outstanding amounts she has a Barclays Education loan of £4,200, and another loan of £8,000 with Frizzel Loans.

In the long term, Adey would like to get into a financial position where she could work fewer hours, leaving her free to pursue other interests. To make this possible, she would like to pay off her mortgage early and build up some savings.

John Donaldson, a financial adviser at Think Positive in Southampton, says the first step is to tackle Adey’s debt.

She recently saw her income fall, after reducing her weekly hours, and this coincided with some home improvements, including a new bathroom, which exceeded her original budget. As a consequence, Adey has accumulated debt on credit cards and loans.

Adey’s immediate priority therefore is to pay off these debts, and put herself in a position where she never builds up this kind of debt again. Donaldson recommends: “Adey should cut up all her credit cards, and start making regular debt repayments until she has paid off everything – aside from her mortgage.”

The best approach is to start with those debts with the highest interest rates. Adey has one card with a 0% interest deal, which ends in five months’ time. Donaldson says this card is a priority, as it needs to be completely paid off before interest is payable, or before she incurs fees to transfer the balance.

Adey has a few shares from the privatisation of Halifax Building Society, and a stocks and shares individual savings account. Donaldson says: “These should be sold immediately and used to reduce the balances.”

He points out that it’s often not worth putting money into investments or savings while you still have expensive debts. Adey is paying up to 18% on some of her borrowing – she would struggle to earn this from any investment.

To help her eat into this debt effectively, Donaldson says Adey also needs to think about alternative sources of income. This could include increasing her working week to five days, or taking in a lodger.

One of her priorities is to achieve a better work-life balance and to spend more time with her daughter, but Donaldson says it may be worth making these sacrifices in the short term, until she’s in control of her debts.

Adey is in a strong position, though, when it comes to her pension. It is projected to provide an income worth 70% of her current income, assuming she works to state retirement age. In addition, it’s a final salary scheme, which Donaldson says “is a rare benefit in the current climate, and does give you some confidence in the future”.

Adey was surprised to hear that changes to the state pension terms mean she won’t receive her state entitlement until the age of 66, but her secure pension tied to her employment will be a vital benefit.

The fact that she has such a good pension in place means, once her debts are cleared, she will be free to focus on her goals of saving and reducing her mortgage.

The first step at that stage is to establish an emergency fund. “Adey should start to save into a cash ISA. This would mean that she would have access to tax-free savings should she hit a mini ‘crunch’ in the future,” says Donaldson. Once she has a reasonable sum saved, her regular monthly payments can be redirected into paying down the mortgage and setting up a more long-term investment, possibly through a stocks and shares ISA.

Beyond these considerations, Adey has taken precautions for the worst-case scenario. She has life insurance, and recently added critical illness cover to the policy, to pay out if she suffers a serious illness.

“This is an important benefit, but writing it in a trust would be an extra, valuable way of making sure the money ends up in the right hands at the right time,” says Donaldson. “A trust wraps itself around the benefits of a life policy, the proceeds of which then become the property of the trust. Trusts have various advantages. For example, the funds could be paid to any beneficiary free of inheritance tax, as the proceeds would fall outside the estate.” 

He adds: “The proceeds could also be paid without waiting for probate to be granted, meaning funds could be available within a few weeks. But any critical illness claim would be paid directly to Adey, rather than to the trust.”

However, although Adey has a will, she cannot find it. Donaldson says it’s vital she digs it out or rewrites it, as it appoints a guardian for her daughter. She also needs to inform her pension trustees as to whom she wants them to pay her death-in-service benefit to.

All in all, Donaldson says Adey’s greatest financial weakness is her debt. But her greatest strength lies in her determination to pay this off and leave herself in a better position for the future. He adds: “I am confident that by adopting some of these strategies, the strength will far outweigh the short-term weakness in Adey’s financial planning.”

Adey’s To–Do List:

Pay off debts, starting with the most expensive

Sell shares and the stocks and shares ISA to help reduce debts
Consider generating extra income to help with debts
Once debts are paid, set up an emergency fund in a cash ISA
Start to pay off the mortgage and set up longer-term savings
Find or rewrite will
Get life insurance written 
in trust

Report edited by Sarah Coles

John Donaldson is a financial adviser at Think Positive in Southampton. Email or call 023 8090 5825.

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