Making plans for Edward

Financial Makeover NAMES SIMON WILSON AND ANDREA PARROTT AGES 30 AND 34 OCCUPATIONS COPYWRITER AND PROBATION OFFICER

SIMON AND his wife Andrea are concerned that their savings are not working as hard for them as they might. Following the birth of their baby, Edward, last month, they know that their disposable income may be drastically affected and they are hoping to make effective provision for the future. Their joint salary comes to pounds 34,000.

Until Edward's arrival, Andrea worked full time, but when she returns, it may be on a part-time basis. Andrea has pounds 14,000 saved up, most of it being in deposit accounts. She also has some Halifax wind- fall shares. Her pension with the Probation Service is a good one, and she has been making top-up contributions.

Simon has savings of pounds 1,500, plus three small savings accounts on three- year terms. He pays pounds 150 a month into a Perpetual PEP, but has no pension from his work.

The couple are three years into a pounds 43,000 mortgage with Cheltenham & Gloucester, and would like to move into a bigger house in three to five years' time.

The adviser: Philippa Gee, managing director at Gee & Company, fee-based independent financial advisers in Shrewsbury (01743 236982).

The advice: With the arrival of Edward, Simon and Andrea feel that life assurance is a priority, particularly in the event of something happening to Simon, as there is no cover apart from the jointly held endowment policy and death benefits within Andrea's occupational scheme.

Although his employer operates an occupational scheme, which includes life cover, Simon has so far taken the decision not to join, as he is keen to set up a personal pension - particularly as he plans to become a freelance writer in the future.

Although Simon has yet to get details on the occupational scheme, we can assume that the employer will pay a percentage of salary into a pension for retirement, and valuable life cover will also be provided.

Bearing in mind that Simon plans to remain in his present job for a further three to five years, I would suggest joining the scheme as soon as possible, to take care of both life cover and pension concerns.

Remember that Simon will most likely have to pay in a percentage of his pensionable salary himself, typically 6-7 per cent, and he will need to budget for this.

When he does decide to become a freelance, Simon should reconsider the pension options available, although he has mentioned that, at that time, he may continue his current job as an employee on a part-time basis, thereby perhaps still being able to participate in the occupational scheme.

The next priority is savings, particularly for Andrea. My concern is that, although we need to look at longer-term investments, Andrea will not be returning to work until the end of March, and until then will receive only maternity pay. I believe that a portion of money should therefore be retained in cash to supplement the couple's income.

Once Andrea returns to work this should be reviewed, although with the plan to move to a bigger house, an accessible fund should be maintained for a deposit.

I would suggest she immediately gives notice (30 days) on her main account, which pays approximately 5 per cent a year gross, as there are now more competitive accounts available, such as Safeway's, which currently offers 7.55 per cent with instant access.

If, however, Andrea is prepared to lock the funds up for at least five years, I would suggest she start with a basic investment such as a Tessa for pounds 3,000 and slowly build this up. The account is low-risk, set for five years with tax-free interest, currently at a rate of up to 8.25 per cent a year with some institutions, although this is variable.

Continuing the theme of building up the basics, I would suggest that Andrea then put pounds 3,000 into a National Savings Indexed Linked Certificate. This is again a low-risk, five-year investment, free of any capital gains or income tax, and the current issue guarantees a return of 2 per cent above inflation per annum, provided it is held until maturity.

Once these straightforward investments have been set up, we can look at more interesting options. I would suggest that the residual money available, almost pounds 3,000, should be invested into a general PEP. Andrea could use a UK fund, such as that offered by Fidelity, topping it up with a monthly sum as family funds permit.

In December, Andrea will receive the proceeds from a fixed-term account held with the Yorkshire Bank, and although the amount is as yet unknown, it is expected to be around pounds 5,000. With the couple's expenses over the next few months, they will need a portion of their funds to be accessible, and for this reason I would suggest that they invest it into the Safeway account to top up their income until March, and then review matters again.

For Simon, a "carpetbagging" exercise has already been implemented with a number of small monthly savings accounts. Though this may lead to windfalls in the future, there is no certainty, and the rates are far from brilliant. Instead, I would suggest that future payments should switched to just one high-interest account.

Simon is also investing monthly amounts into a PEP, which is an excellent start. However, the amount is currently split between six different funds, which I feel should be altered to just two or three. The PEP is his only equity holding, yet almost two-thirds is being invested in higher-risk funds.

Instead, Simon should concentrate on UK and European larger-sized company funds for the time being, and then revisit the decision in April 1999, when payments to a PEP must stop.

The couple's joint mortgage "deal" has ended and payments are now based on the standard variable rate. We usually suggest that a further deal be negotiated with the lender, or a remortgage be arranged to attract a discounted, capped or fixed rate to reduce your monthly costs and thus boost savings.

Unfortunately, they are locked into the present mortgage for a further two years, and cannot move without suffering substantial early redemption penalties. Once they can switch, I would strongly advise them not only to consider the most competitive deals at that time, but also to choose one that will carry no penalties after the "deal" itself has finished, giving more flexibility. They should be able to carry the scheme across to a new property, should they move during the initial term.

Finally, there is a sum of around pounds 100, which they would like to invest for Edward on a one-off basis. While over the long term, a building society account may not be the best savings route, it is difficult to find an arrangement in which the charges of setting up a plan don't eat into the investment too much.

I suggest Simon and Andrea consider National Savings Children's Bonds, which will take a one-off sum of between pounds 25 and pounds 1,000. These are in essence five-year plans, currently offering a guaranteed rate of 5 per cent, and are free of tax. On maturity, the proceeds can be automatically reinvested for a further five years and this may continue until a latest age of 21, which should suit their requirements precisely.