Wealth Check: Father-to-be needs to plan future

Is buy-to-let the best bet to accumulate savings for a child's private education? And what should a 28-year-old put aside to ensure a good retirement pension?

Richard Evanson will soon be a father. The 28-year-old computer consultant is eagerly awaiting the birth of his first child by his fiancée, Claire Challenor, due tomorrow.

The couple met at a friend's birthday party in Folkestone, Kent, and have been together for three years. They hope to marry at Easter in 2004. Ms Challenor, 27, is a nurse at St Thomas' Hospital in London.

Mr Evanson works for Logica, the UK's largest independent IT consultancy, in their space and defence division, and has just finished a six-month stint on a European Space Agency project in Frankfurt. He is based in Leatherhead, Surrey, and commutes from London using his partner's car or the train.

He joined the company in 1995, with a degree in maths and computer science from Salford University. "Thankfully, I managed to avoid much debt since it was quite cheap and rough up there," he says. He enjoys his job and thinks he has found his niche in IT. In 2000 he took a year off to travel and work in Australia.

Mr Evanson and his fiancée rent a two-bedroom flat in Elephant and Castle, south London. "It's a bit pokey, but close to Claire's work and we like the area," he says. He thinks their rent, £500 a month, is good value. His partner owns a three-bedroom detached house in Wolverhampton with her sister. Mr Evanson is considering buying out Ms Challenor's sister and renting out the house. They estimate this would cost about £20,000 and they would take on the £80,000 mortgage.

"We'd love to get on to the property ladder here in London," he says. "But houses are simply too expensive. Even if we wanted to move beyond the M25 into Surrey, nearer to my office, houses would be too expensive. Prices in Leatherhead and Chobham are as bad as in London."

Mr Evanson has £25,000 in savings, in various PEPs, ISAs and building society accounts. "Most of my equity-based investments are performing badly but my Virgin ISA, which has £18,000 in it, has been really disastrous. It was worth £25,000 a few years ago". He wonders whether to reinvest it.

He pays 8 per cent of his salary into a contributory pension, which Logica matches. He is unsure whether to contribute more. He also holds £6,000 in Logica shares from stock options.

Mr Evanson wants to start saving for the baby and to set aside savings for a private education. He does not know how many children they will have.

We put his case to Stephen Gabbitas, independent financial adviser at Skerritt Consultants in Hove, East Sussex, Paul Willans, director of financial planning at Blick Rothenberg Chartered Account-ants in London, and Philippa Gee, investment strategist at Torquil Clark in Wolverhampton.

Profile

Richard Evanson, 28

Status: Engaged to Claire Challenor, 27, a nurse at St Thomas' Hospital in London

Occupation: IT consultant for Logica

Education: Maths and computer science degree from Salford University

Salary: Circa £30,000

Debts: None

Savings: £25,000 in ISAs, PEPs and building society accounts

Stocks and shares: £6,000 of Logica shares, obtained through stock options

Pension: Contributory company one

Property: His fiancee owns 50 per cent of a property in Wolverhampton with her sister, on which there is an £80,000 mortgage. They rent a two-bedroom flat in Elephant and Castle, south London

Outgoings: (Per month) council tax £100; utility bills £100; food £80; restaurants and entertainment £100; telephone £20; rent £250.

'You should buy your own home and step up your contributions'

Solution 1: Buy-to-let

Ms Gee says lenders consider mortgages for-buy-to-let properties higher risk than residential ones and charge a higher rate of interest. They also expect the prospective rent to exceed mortgage interest payments by at least 125 per cent. She warns that Mr Evanson will have continuing legal obligations as a landlord to maintain the property and to ensure tenancy agreements and notices to quit are properly drawn up.

Mr Willans says it may be in their best interests to sell the property. By realising their share of the equity and ridding themselves of the mortgage loan, they will be in a much better position to find their own property in the London area. In buy-to-let, they should be aware of the restrictions this may have on their ability to borrow for their own home.

Mr Gabbitas says as long as the mortgage is set up correctly, and the rental market in Wolverhampton is buoyant, renting it could be viable. It may be possible for Claire to obtain a larger mortgage by herself to buy out her sister, leaving Mr Evanson's income intact to raise another mortgage.

Solution 2: Pension

Mr Willans says Mr Evanson has valuable pension benefits from his employment and should be on target for a pension of half his salary at age 65. But if funds allow he should consider increasing contributions.

Mr Gabbitas says Mr Evanson should ask his company if they would increase pension contributions to match his. If the company will pay more he should take advantage of their generosity and contribute as much as he can.

Solution 3: Education

Ms Gee says the amount Mr Evanson needs to save for future education provision depends upon when he wants private education for his child to start. Through pre-school, primary and secondary private education, fees get progressively higher. It also depends whether he wants his child to attend as a boarder or as a day pupil. Fees also vary widely from school to school.

Mr Gabbitas says the Independent Schools Council reckons sending a child to a boarding school will cost well in excess of £15,000 a year, and approximately half this for a day school. With school fees rising far faster than inflation, the amount needed to fund their child's education in 15 years will be astronomical. A rough guide to the amount that they need to save depends on when their child starts privately. At seven, a monthly contribution of more than £1,000 is needed, but if this is delayed until the child is 11, the amount is almost halved. If their priority is to pay for university fees alone, they should put aside £100 a month.

Mr Willans thinks it is likely to be several years before they can contemplate targeted provision for school fees and they should reflect on whether such a commitment will ever be affordable, unless their parents and grandparents are in a position to help.

Solution 3: Virgin ISA

Mr Gabbitas says the downside to a tracker fund, such as Mr Evanson's Virgin ISA, is that they are heavily weighted in certain areas such as banking and telecoms. You only have to look at what has happened to the share price of Lloyds TSB and Vodafone to see the effect this can have on a fund. Such heavy weightings negate the relative safety of diversification.

Ms Gee says Mr Evanson should transfer his Virgin ISA into a fund supermarket and diversify his portfolio. She would suggest a roughly equal split between a UK all-share tracker, a UK small companies fund and a UK income fund. Her suggestions for the latter two would be Artemis UK Smaller Companies and Liontrust First Income .

Mr Willans says with more than 70 per cent of Mr Evanson's savings in one ISA fund, he would urge diversification. He says in fairness to Virgin, their index tracker fund has done what it says on the tin; it has faithfully tracked the stock market down. Although the future for shares is looking more optimistic, Mr Evanson may wish to switch some funds into Virgin's corporate bond fund, but he could face a double whammy if interest rates rise, because bond values would conversely fall.

If you would like to be given a financial health check-up, please write to: Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.