An Example of an investing scenario

Steven and Rebecca, aged 50 and 40 respectively, have a baby, James, aged 18 months. Rebecca is a teacher. She has given up full-time work for now, although she still does some supply teaching. She will probably return to work when James starts school. In the meantime, the family is relying mainly on Steven's salary of £32,000 p.a. plus fringe benefits.

After tax, Steven and Rebecca have an income of about £2,300 per month. Their spending matches this, leaving nothing to spare to meet their financial goals. The largest outlay is £1,000 per month for their £113,000 mortgage. The mortgage is backed partly by endowment policies (with built-in life cover). The remainder is on a repayment basis.

Neither Steven nor Rebecca has made a will. Steven has £96,000 of life cover through his occupational pension scheme. Rebecca has life cover only equal to her salary through the Teachers' Superannuation Scheme. It is unclear what income protection they would each have if they could not work because of illness or disability.

The couple has £110,000 in assorted deposit accounts. Their only other investment is £8,000 invested in four shareholdings. Steven and Rebecca's main concern, being mature parents, is to plan ahead for their son's education, particularly university, whilst making enough savings for their retirement. They are planning to retire at the normal pension ages for their schemes: 65 for Steven and 60 for Rebecca. Steven has been in his current job for only five years. Rebecca is paying AVCs to boost her pension from the teachers' scheme.

 

As a top priority, Steven and Rebecca should make wills. Steven's life cover looks sufficient, but Rebecca's would be too little to replace her work as homemaker and childcarer. They should also take out a family income benefit policy on Rebecca's life for, say, £10,000 p.a. until their son is 18.

They both need to check the position if they could not work because of illness and, if necessary, take out income protection insurance. They could also look at critical illness cover. They should reduce the amount they have on deposit with banks and building societies to, say, £4,000 to £5,000. The rest could be invested elsewhere at medium risk (in bonds, say) for a better return. Their current mortgage is costly. Switching to a cheaper loan could save them as much as £250 per month. If they think interest rates are unlikely to fall, they could consider a fixed-rate loan. They could sell their shares to repay part of their mortgage.

Steven and Rebecca should use some of the money that they save on the mortgage for regular savings. They should consider a unit trust, an OEIC or an investment trust savings scheme held through an ISA. A UK equity or an international general fund would be a good option. These are flexible investments that could be used later on to fund James' education or their retirement income. Steven should check what pension he can expect from his previous jobs. If his expected retirement income looks to be falling short of the income he would like, some of the savings should be used to pay AVCs to boost Roger's pension. Rebecca should check whether she is paying too much in AVCs given her current low income. They should review their plan when Rebecca returns to work in about three years' time.

 

UK Investments - Financial, Property & Other Investments - 1998-2008

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