Making sure security runs in the family

Names: David and Kate Watson

Ages: 44 and 42 respectively

Occupations: Development manager and data base analyst

Financial Issues: David earns pounds 50,000 a year and has a company car. Kate works part-time for pounds 6,000 a year. They have two sons aged 12 and 10, who attend a state school. The family live in Wiltshire, in a house worth pounds 135,000, with mortgage loans of pounds 92,000, to be repaid by two endowment policies when David reaches 60. They also have a credit card balance of pounds 3,000 and a with-profits endowment policy about to mature for pounds 9,000.

Their financial planning priorities are to ensure family security in the event of David's premature death; to ensure that they are adequately prepared for the cost of the boys' education at university in due course; and to have pension arrangements that will provide them with a good income after retirement when David reaches 60.

They want to know the implications of David taking early retirement and are keen, having recently completed the purchase, extension and renovation of their current home, to start a form of monthly investment to raise capital in the future. They have no current need for any large sums of cash other than for annual holidays.

The Adviser: Colin Stenning, a Fellow of the Institute of Financial Planning and a certified financial planner, is managing director of Harvey Parker Stenning, 47 Cheap Street, Newbury, Berkshire RG14 5BX, 01635 34140.

The Advice: The family is relatively well protected in the event of David's premature death by the endowment policies which would repay their mortgage loans and the death-in-service benefit of four times his salary from his employer. Kate would need a net income of about pounds 17,000 a year in today's terms to maintain her standard of living. A further pounds 90,000 of cover on David's life would be required to maintain this cash flow, proofed against inflation.

Additionally, it would be sensible if David could receive a lump sum should he fall victim to a critical illness, such as heart attack, stroke or cancer. Cover to provide, up to David's age 60, a benefit of pounds 50,000 for critical illness with a further pounds 90,000 payable on death would, as David is a smoker, require a contribution of pounds 110.78 per month. A policy offered by Pegasus is comprehensive and competitive in cost. David's employer would maintain his net income in the event of long-term sickness or disablement until his normal retirement age.

The family's basic financial security derives, for the most part, from David's existing terms of employment. Clearly, were he to change jobs a full review of the benefits provided would be necessary.

To provide pounds 4,000 per annum in today's terms for each of their two sons at university over a three-year course it would be sensible to use personal equity plans (PEPs), which have tax advantages and potential to achieve above-inflation returns. Regular contributions of pounds 200 per month increasing at 5 per cent a year compound, payable for six years, should provide the funds for when the children are 18, assuming an investment growth rate exempt from tax at 9 per cent per annum compound. We would suggest Skandia's MultiPep which offers a competitive charging structure and a wide range of fund choice, including those of many of the best known fund managers. Notice does however need to be taken of the Government's plans to launch Individual Savings Accounts with effect from April 1999. To ensure that these funds for university were available in the event of David's premature death, additional cover on his life of pounds 24,000 would be required, meaning a monthly outlay of a further pounds 15.

With their mortgage paid off when David reaches his 60th birthday, the Watsons expect to spend about pounds 19,000 a year in today's terms to maintain their desired standard of living. On present projections the benefits arising from David's past and present pension schemes appear to show that expenditure will exceed income by about pounds 3,000 a year.

Aside from his employer's contributions, it is possible for David to set aside up to 15 per cent of his taxable earnings and scope exists for an additional pounds 3,900 to be invested each year, on which he would receive tax relief at his marginal rate of 40 per cent. As he is already contributing to a pension top-up scheme, he could either increase contributions to this, or make contributions to his employer's own Additional Voluntary Contributions Scheme.

If David wishes to take retirement earlier than age 60, greater contributions will need to be made to achieve an equivalent result. On the basis of present funds and contributions it is worth noting that retiring at age 55 would increase the shortfall referred to above to about pounds 7,500 a year.

The proceeds of the maturing endowment policy (pounds 9,000) could be used in three ways. First, pounds 3,000 could clear the credit card debt on which interest charges are high. A further pounds 3,000 could provide a contingency fund in a building society account in Kate's name (as the lower rate taxpayer) and the balance of pounds 3,000 made as a lump sum investment into the PEP referred to above, to give a head start to the saving programme for the boys university education. Windfall shares held in David's name could be transferred into Kate's name reducing the liability to tax on dividends from 40 to 20 per cent.