Financial makeover: Dirty nappies, tidy finances

Ceinwen and Tony Frost married last November and live in Cardiff. He is 39 and works as an electronics engineer earning pounds 20,000 a year. She is in her early 30s and works as an NHS midwife earning pounds 23,000. Ceinwen is pregnant with their first child and the baby is due in September.

The couple live in a house bought by Ceinwen in 1993 for pounds 49,500. The repayment mortgage, which is with the Principality building society, costs pounds 298 a month. Tony rents out the house he owned when he was single. That property was bought for pounds 64,000 in 1991, on which he gets pounds 495 of rent a month, against a mortgage repayment to the Halifax of pounds 440. But management fees of pounds 58 a month, as well as tax and insurance, mean the property costs him money.

Ceinwen has a pension through the NHS Superannuation Scheme, into which she has made 11 years of contributions. She also has two pension plans through the Royal National Pension Fund for Nurses: one taken out in 1992 to which she contributes pounds 20 a month, the second taken out in 1993 for pounds 50. Tony has been making contributions to a company pension for 12 years. The couple pay pounds 500 into a savings account every month as a float for house renovations and holidays, and in practice most is spent. They have no other savings.

Ceinwen has a car loan costing pounds 177 a month, while Tony plans to replace his car in the Autumn, which they fear means another loan.

Ceinwen's pregnancy clearly throws up complications for their overall financial situation. There will be extra costs, although Ceinwen is entitled to 18 weeks' full pay when on maternity leave. Should the couple sell one of their properties? And what would be a suitable investment plan to set up for the baby (say for university costs)?

What a financial adviser recommends:

Our adviser says Ceinwen and Tony are "starting to move in the right direction". Their first priority now should be to cover risks, she says, then look at building up resources.

With a baby on the way they need life insurance, probably around pounds 150,000, and ideally this should have been sorted out as soon as Ceinwen knew she was pregnant. The couple are both relatively young, however, and there is a greater risk in coming years that they will become seriously ill than actually die. So insurance to cover the resulting financial trauma, called critical illness insurance, should also be considered.

The cost of these policies does not have to be too onerous. Tony could stop paying the pounds 58 a month of management charges he is paying to an agent for doing little other than collecting the rent on his old house, and collect the rent himself. The pounds 58 saved could cover the cost of the insurance. To make it easier getting his rent, it should be fairly straightforward getting the tenants to pay by standing order.

It is also important to remember that the life and critical illness policies do not have to be taken out for ever, as the couple build up assets they can reduce or even get rid of the cover.

That will take some time, however. At present the couple are spending their pounds 500-a-month savings on house renovations and holidays and the baby will mean some new costs. Ceinwen expects to go back to work after her maternity leave but this may not be full-time, which would mean a reduction in the couple's income. Against that they will get around pounds 50 a month family allowance when the baby is born.

If they do go ahead and buy a new car in the autumn and this requires a loan, they should look at consolidating this with the existing loan. This may reduce the overall rate of interest.

Taking all that into account, the Frosts should still be able put pounds 200 a month aside for savings. Tax-free Tessas and PEPs are the obvious places to start, given their combination of tax advantages and relative accessibility. Our adviser is not overly concerned about the Budget announcement of the introduction of Individual Savings Accounts and the likelihood that these will supersede existing tax-favoured investments. PEPs, she believes, "may have a name change" but that will be about it.

Any PEPs should be growth oriented and include some overseas' investments, and the couple should look at setting up a PER each to spread further the risk of choosing a poor performer.

The baby cannot have a PEP of its own. But it is possible to designate other investments as being held on behalf of a child, such that the child's own personal income and capital gains tax allowances can be used to keep returns tax-free. A growth-oriented unit trust would be suitable, and a neat way of funding it might be with the pounds 50-a-month family allowance.

On pensions, ideally both need to look at additional funding. Ceinwen withdrew four years of pension contributions from the NHS scheme when she was younger under pension rules then prevailing, while Tony did not start making pension contributions until his late 20s, and could do with topping up his savings. Ceinwen needs to investigate the cost of buying back the four years of cashed-in contributions while Tony needs to clarify the position on his provision.

Finally, with the housing market recovering, it is probably worth hanging on to Tony's old house for now.

q Ceinwen and Tony Frost were talking to Julie Lord, managing director of Cavendish Financial Management, a Cardiff-based independent financial adviser.

If you would like to be considered for a financial makeover for publication, write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL. Fax: 0171-293 2096 or 2098; e-mail: indybusiness@independent.co.UK. Please include details of your current financial situation, a daytime telephone number, and state why you think you need a makeover.