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.
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
2 . Sell shares and the stocks and shares ISA to help reduce debts
3. Consider generating extra income to help with debts
4. Once debts are paid, set up an emergency fund in a cash ISA
5. Start to pay off the mortgage and set up longer-term savings
6. Find or rewrite will
7. Get life insurance written in trust
Report edited by Sarah Coles
John Donaldson is a financial adviser at Think Positive in Southampton. Email email@example.com or call 023 8090 5825.
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).
The process of applying for the right to deal with a deceased person’s estate. If a person has left a will, they will usually have appointed a will executor. The executor then has to apply for a ‘grant of probate’ from the probate registry, which is a legal document that confirms the executor has the authority to deal with the affairs of the deceased. If a person dies without making a will, intestacy law applies (see intestate).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
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.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
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.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
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.
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.