When there's a will

Makeover: Diane and her long-term partner should start by considering what happens if one of them dies

NAME: Diane Savage

AGE: 38

OCCUPATION: corporate liaison officer with a professional body.

BACKGROUND: Diane earns pounds 24,000 and plans to stay with her employer. Her long-term partner, Tony, is a graphic designer and they jointly own a property mortgaged on a fixed rate with the Bank of Ireland. In addition they have a small loan for home improvements through Midland Bank. The mortgage is covered with a joint life policy.

Diane has a good company pension scheme she joined 30 months ago. She also enjoys good health benefits from her employer. She has recently inherited pounds 10,000 and wonders what to do with this. She has ethical concerns about where her money is invested.

THE ADVISER: Amanda Davidson, a partner at Holden Meehan, a firm of independent financial advisers in London (Tel 0171 404 6442)

THE ADVICE: "Diane benefits from a final salary pension scheme set up by her employer, where her final retirement income will be linked to the number of years she has been with the organisation. Her pension benefits are due to be paid at 62. In fact, Diane has indicated that she would like to retire at 65 and the pension scheme does allow for this.

As Diane and Tony are not married, there are various house-keeping exercises that they should undertake. There are also benefits for which Diane is eligible that Tony cannot take advantage of.

The main one is the spouse's pension that would be paid in the event of Diane's premature death. Only the most enlightened employers make provisions for common-law spouses and Tony stands to lose pounds 5,000 a year should Diane pre-decease him, because they are not married.

However, Diane has already made provision for Tony with her death-in- service benefit which is four times her income. She should also ensure that provision is made for Tony to benefit from the Allied Dunbar personal pension that she had prior to joining the company pension scheme.

Tony has a personal pension plan and he should make sure that this is left in trust for her. Neither of them has made wills, and this is something that they should do post-haste. They should check that ownership of the house is joint tenancy, so each will own the property should the other die.

Diane's firm provides a good health insurance policy for her if she should fall ill. This is basically 50 per cent of her income which increases at 3 per cent per annum. Whilst the 3 per cent increase is fine in low- inflation times, if the cost of living should increase the real value of Diane's ill-health income would reduce.

I therefore recommend that she consider taking out a critical illness policy for the amount of the mortgage - pounds 66,000. Critical illness policies pay out in the event of the onset of certain illnesses and diseases, such as cancer, heart attacks or strokes. This would cost pounds 20 a month with Skandia, an insurer that has an ethical fund.

Diane's pension is very good. However, she has joined it late and therefore there is room for improvement. If she retires at 65, she would be looking at about 50 per cent of her income. In order to top this up by a further 10 per cent, she should invest pounds 60 a month net of tax into an additional voluntary contribution scheme (AVC).

She indicates that she has pounds 380 a month left after basic household bills have been paid. Some of this will be taken up with the AVC pension top- up. The companies that I recommend she looks at for topping up her pension would be Friends Provident and NPI, which both run ethical funds.

Diane should certainly also investigate the in-house arrangement that the professional body operates. She is likely to find that the charges will be lower with this scheme but she will not have the discretion of investing where she chooses, for instance in an ethical fund. She will have to weigh up the lower cost versus the other benefits of flexibility and choice.

As far as the inheritance is concerned, Diane has pounds 10,000 for investment. I am not recommending that she repays some of her mortgage as it is on a fixed rate with the Bank of Ireland and she would suffer redemption penalties for so doing.

I recommend that she keeps pounds 2,000 aside for short-term emergencies in an accessible fund. She should look at a postal account such as Cheltenham & Gloucester which would give a gross interest rate of 5.5 per cent for a 30-day account.

For the remainder, I recommend that she put pounds 6,000 into a PEP and pounds 2,000 into a Tessa.

If Diane is looking to invest her PEP in the UK, then Credit Suisse or Friends Provident will suit, and if she is looking to invest internationally, NPI and Jupiter fit the bill. As far as the Tessa is concerned, then Birmingham Midshires Inflation-Beater Tessa offers a guaranteed 3 per cent over the retail price index with a current rate of 6.5 per cent.

My recommendations will change if Diane can repay her loan without penalty. This will release pounds 136 a month for further savings which she could use to top up a Tessa, for instance.

Given that she has indicated that she has additional sums available each month, I would recommend that after she has invested in a critical illness policy and a pension top-up, she should decide on a further sum to place in a PEP.

If, say, Diane chooses one PEP for this tax year, her monthly savings can be invested in another PEP to give her a spread of risk. The PEPs should be set aside for a five-year-plus period and Diane has indicated that this is the length of time she is looking to.

In summary, Diane has good provision but needs to keep up the discipline of savings. This will ensure that she has a comfortable future, irrespective of the uncertainties of life."

(Amanda Davidson's advice was given shortly before the end of the 1996- 97 tax year, allowing Diane to take advantage of that year's tax allowance for her lump sum PEP investment)

THE VERDICT: "I have taken up Amanda's advice on a number of issues. For instance, I am taking steps to pay off the Midland Bank loan and I have already made the lump-sum PEP investment. We were aware of the need to make wills and we have one in front of us right now, literally.

Amanda's advice sounded sensible and it made me want to act on it immediately."

If you want to take part in a financial makeover, please write to: Nic Cicutti, "Free Financial Advice Offer", The Independent, One Canada Square, Canary Wharf, London E14 5DL, enclosing a few brief details about yourself and a telephone number.