Q. My partner and I who are both in our twenties have two young children, aged 6 and 4. My partner has a salary of £28,000 per year, and I currently look after the children. He has life cover through work which pays out 4 times his salary. Is this enough?
A. This is one of those questions where there are a number of issues which need to be considered. Firstly, you need to think about what liabilities would need to be paid, such as mortgage and loans, which would need a capital sum. Then you need to consider what income you would need. The most cost-effective cover to generate income until children have grown up is called Family Income benefit, which pays an income for the remainder of the policy term. You should also consider what cover is needed on your own life. Would your partner be able to work if you were not there to look after the children? The costs of replacing a stay at home mother with a nanny, cleaner, after school clubs etc are substantial. A 20 year policy paying out £20,000 per year for a 28 year old non-smoker could cost less than £10 per month. Finally, you should ensure the policies are written in trust, to make sure they pay out to the right people (unmarried partners are not recognised under the rules of intestacy). The trustees of the work-based plan have discretion over who they will pay the benefit to, and will often consider an “expression of wishes” left by the member, so it is important to ensure this is up to date. You should also consider writing wills. As well as the financial issues around who inherits your estate, and the rules of intestacy, importantly a will allows you to appoint who you want to look after your children if you were both to die.
Q. I have a £60,000 personal pension fund. I am 58 and still working. I have heard that from next April I will be able to draw my fund in full if I wish, and I am tempted by having access to this money. Is this a good idea?
A. Firstly, I must point out that I do not have enough information to give you individual advice. However the new pension freedom which has been announced has caused many people to take another look at pensions. The idea behind the changes is that people should have greater flexibility to control their own money, rather than being forced to tie their fund up in an annuity. The danger is that the fund will be gone before you finish needing to rely on it, and you will be left with too little income later in your retirement. The exercise I am encouraging everyone to undertake before they surrender and spend their pension fund is to work out what you spend currently, and of that spending, what will continue into retirement? In particular, what do you need to cover “essentials”, such as heating, food, council tax etc. Then you might have spending which is “nice to have”, such as meals out or weekends away. Finally, you might have luxury things, such holidays, cruises etc. Then look at what income you will get from the state pension, when it becomes payable, and from any final salary pensions etc. How do the two figures compare? Finally, if you feel that you can afford to surrender the personal pension fund, 75% of that fund will be subject to tax at your marginal rate of income tax. Does it make more sense to spread that over a few different tax years, or draw it when you have finished working, so that the tax deducted is at a lower rate? There are a number of things to consider. Whilst there will be guidance available free of charge, my understanding is that this will tell you what you “can” do. I would suggest that with such an important issue, it is worthwhile taking advice from a chartered financial planner who can help you decide what you “should” do.
Q. I live on my own having divorced my husband a few years ago. We had no children. I work full time but have had very little in the way of pay rises for about 6 years now so with food and commodity prices generally increasing I am finding my monthly budget is getting very tight. The variable rate mortgage on my house still has about 15 years to go and I am worried about the talk of interest rates going up and it becoming unaffordable. What can I do?
A. I suggest that you talk to your mortgage lender as unless you are tied into a particular deal for your existing variable rate mortgage you should be able to switch into a fixed rate mortgage for a fixed term of years so that during this period even if interest rates do increase your mortgage payments will remain the same. If you’re existing lender is unable to help talk to an Independent Financial Adviser who specialises in mortgages.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
