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Q&A: Securing a financial future
By Hannah Ricci
The profile
Jason and Julie Hall live along with their 20-month-old son Edward in Cranborne in Dorset. Jason, 42, is an account manager at a research and development company and Julie, 34, works as a self-employed bookkeeper. Together they earn around £3,700 a month after tax. Jason also has his own artwork business, from which he earns around £2,000 to £3,000 a year.
The Halls have an offset mortgage with the Virgin One account on their £500,000 house, which will be paid off before the end of the year. They contribute £500 a month to a regular saver account with Yorkshire Building Society, which has a current balance of £4,500. They also have two cash ISAs, one containing £3,025 with National Savings & Investments, and another for Edward with Nationwide, holding £2,548. Jason and Julie also contribute to two stocks and shares ISAs, which are currently worth £5,117. They have invested Edward's £250 child trust fund voucher in an investment trust, and contribute £25 a month. "We want to achieve long-term financial security for the family and be comfortable in retirement," says Julie. "We'd like to review our current situation to ensure we can meet these goals."
The expert's view
Kevin Bailey, managing director of independent financial planners, Wessex Investment Management, says in addition to their initial objectives, Jason and Julie need to address a number of other factors - including protection, estate planning and their investment strategy. "But the Halls have their financial affairs relatively well-organised, and generally just need to fine tune their protection needs and continue with their tax-efficient regular savings," says Bailey.
In the event of Jason suffering from long-term sickness or disability, he currently has cover through his employer equivalent to six months full pay, followed by six months half pay. "Previously, Jason's pension scheme would have commenced following this 12-month period, however his employer has recently announced a change to its pension scheme to make such payments unlikely," explains Bailey. When the change commences in January 2008, Jason needs to clarify how much benefit he will receive.
"In the event of his employer only providing cover for the first 12 months of any period of incapacity, I recommend Jason takes out an individual income protection policy, with a deferred period of 12 months," explains Bailey. "A premium of around £75 a month would be sufficient to generate a benefit of £2,216 a month until either Jason is fit to return to work, he reaches retirement age of 65 or suffers premature death."
Jason and Julie have critical illness cover of £100,000, which would pay out a lump sum if either of them suffered from a qualifying illness, such as heart disease, cancer or a stroke. "This cover was initially taken out to protect the outstanding mortgage balance," says Bailey. "This is no longer necessary, but they now have Edward to consider." He recommends they replace the existing policy with either a level term plan or a whole of life policy. "A benefit of £100,000 could be provided for a premium of £80 a month for 16 years - to coincide with Edward turning 18."
A level playing field
The Hall's currently have a joint decreasing term life assurance plan to the value of £108,000, and Jason has a death-in-service plan from his employer, equivalent to around six times his salary. "Now the mortgage has been cleared, the decreasing term plan is no longer suitable, and should be replaced by either a level term plan or a family and income benefit (FIB) policy," explains Bailey. "A FIB plan would pay out a fixed benefit over the remaining term of the plan and could be used to provide cover in the event of Julie's premature death, so that Jason would have sufficient income to meet ongoing liabilities and care for Edward as he grows up." Bailey says the premium for a plan to provide £25,000 a year following Julie's death would be around £15 a month.
Next on the agenda is the Hall's pension provision. Julie doesn't currently have a pension and Jason contributes to his employer's defined benefit scheme (final salary) - which is soon switching to become a defined contribution scheme. Initially, his employer will contribute double what Jason does for a period of 12 months - up to a maximum of 20% of qualifying salary. "Given this encouragement from his employer to save for retirement, it would be wise for Jason to maximise his pension contribution during this time," says Bailey. Any additional payments towards retirement, however, should be made elsewhere to diversify the fund and achieve greater investment potential for both Jason and Julie.
Adventurous investing
The Halls' existing investments held in their equity ISAs are relatively high risk. "The selected funds are more adventurous than might typically be chosen. However, Jason and Julie feel that with the long-term objective of building funds independent of pensions, these are appropriate given the potential for capital growth," says Bailey. Jason is invested in AXA Talent and Jupiter Financial Opportunities, while Julie is invested in Aberdeen Emerging Markets, Artemis European Growth, Artemis Global Growth and Hargreaves Lansdown Special Situations.
"Going forward, it may be appropriate to incorporate more UK and European equity-based funds, in order to reduce the impact of currency exchange rates on investment returns," says Bailey. "However, for the time being these funds can continue to be used, although I would suggest they replace AXA Talents with a strong UK fund such as Schroders UK Mid 250, in order to widen the investment choice and reduce the reliance upon global funds." He recommends that they each increase the level of funding to their ISAs to maximise the annual contribution limits, which are currently £3,000 for cash ISAs and £4,000 for equity ISAs.
"Saving into ISAs should be the preferred method over and above Jason's contribution to his employer's pension scheme," says Bailey. "This will allow maximum flexibility and access to capital at all times: saving everything into a pension would tie up funds until Jason reaches age 55 at the earliest." Building up an accessible pot of money is also important because the Halls may consider putting Edward through private school, so they will needs the funds available to pay for school fees.
Jason and Julie have up-to-date wills and have also recently appointed enduring powers of attorney. "In his recent pre-Budget report, the chancellor announced the automatic passing of unused inheritance tax allowance, so Jason and Julie don't need to take any action at the moment," explains Bailey. "However, it is something that should be reviewed regularly, especially if house prices continue to rise and their investments continue to grow."
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