A finishing school for savings

FINANCIAL MAKEOVER Graham and Sarah want to make sure they can build up enough funds to give their daughter, now aged 2, a chance to go to university

Graham Rees and Sarah Talbot: Graham is 31, Sarah is 29. Their daughter, Megan, is 2.

Occupation: Graham is a university admissions clerk, Sarah is a primary teacher.

Salary: Graham earns pounds 12,250 a year, Sarah's salary is pounds 20,900 a year. Their combined net income is pounds 1,870 a month.

Pension: Both are members of the occupational pension scheme where they each work.

Mortgage: They have a repayment loan of pounds 44,300 with Abbey National. Annual interest is on a fixed rate of 5.75 per cent until September this year. Negative equity isn't a problem; their home is worth more than the amount of the mortgage.

Investments: Graham bought an Arsenal FC Guarantee Bond, which guarantees him a season ticket for life. He paid pounds 1,500 for it and could sell it again if he had to at its current market value of pounds 1,700.

Savings: None, but they do have a life assurance policy worth pounds 47,310 with Winterthur Life, which will pay off the mortgage if either of them dies. They also have life assurance cover from their employment which will pay three times Graham's annual salary and one times Sarah's salary in the event of premature death.

Commitments: They have car loans and personal loans outstanding of pounds 9,750, on which the repayments are pounds 301 a month. These will be paid off in July next year. Their outgoings, including child-minder's fees of pounds 320, come to pounds 1,770 a month.

Graham and Sarah are not married, but with the erosion of the tax relief on the married couple's allowance to just 15 per cent on an allowance of pounds 1,790 a year, rising to pounds 1,830 from 5 April, the tax savings of pounds 5.25 a week is hardly an overwhelming incentive to tie the knot. (Advocates of Family Values campaigns, please note!)

They would both like to start saving in the near future, with the idea of being able to help Megan through university if she decides to go. Sarah is a vegetarian and has strong ethical concerns.

What should they do?

They both have occupational pension schemes and by current standards have reasonably secure jobs with the prospect of secure continuous employment.

They also have life insurance cover if one or other of them meets an untimely end, and the mortgage will be taken care of. But they have no cover against either of them contracting a critical illness such as cancer, a stroke, or a heart attack, or being unable to work through injury or disablement. In either case their current commitments would continue unchanged.

They do not have enough disposable income to meet all their concerns right away. But I would strongly recommend that they take out a policy covering them against death and being unable to work after contracting a critical illness. Any remaining spare money should be invested in a building society account as a fund for emergencies.

They have no spare cash to start a long-term savings plan but when the personal loans have been paid off in July 1998 they could set up a savings plan for Megan's university fund. They might well decide to make monthly contributions into a personal equity plan investing in an ethical fund such as Credit Suisse Fellowship, Framlington Health, United Charities Ethical, Friends Provident Stewardship or Jupiter's Ecology unit trust, the top five ethical funds over the past five years.

They have an attractive fixed-rate mortgage but that reverts to a standard variable rate later this year. In practice they are also tied by redemption penalties for a further three years before they can consider a remortgage package with another lender.

q Graham Rees and Sarah Talbot were talking to Robert Luty at Castle View Insurance Consultants, an IFA based in Huddersfield.

If you would like to be considered for a financial makeover, write to Steve Lodge, personal finance editor, Independent on Sunday, 1, Canada Square, Canary Wharf, London E14 5DL.