Personal Finance: Financial Makeover - A tale of two Cats

After leaving school and doing several jobs in the UK and abroad, Catherine (Cat) is nearing the end of a two-year HND course in shoe design and manufacture. She has managed her finances well, with a little help from dad to keep her Renault 5 going, but now wants to plan ahead - particularly with regard to pensions.

She is renting a room, but wants to move out and share with her boyfriend. She has pounds 3,500 outstanding in student loans, and, apart from a pension plan used to contract out of Serps a few years ago, has about pounds 1,000 to see her to the end of her course. She has no financial dependants apart from Molly, her cat.

The adviser: Thomas McPhail, pensions development manager at Torquil Clark, independent financial advisers (telephone: 01902 570570).

The advice: Cat's student loan is being charged an interest rate equal to inflation, an attractive deal compared with normal high-street lenders. She does not have to start repaying it until her income exceeds pounds 17,784 pa gross; since her starting income is likely to be pounds 12,000-pounds 15,000, this is not an immediate problem.

Cat will need up to pounds 800 as a deposit on her new rented accommodation, and the Renault will need replacing soon, so she would be better off retaining as much of the original student loan as possible, and saving any surplus income from her new job. Though borrowed money is expensive, and it is generally more efficient to clear debt, by doing this she will avoid a new loan at normal high-street rates.

If she does need additional finance to buy a replacement car, she can expect to pay up to pounds 35 per month for every pounds 1,000 borrowed.

Cat is currently holding her cash in an instant-access account with a high-street building society and using a Barclays current account for day-to-day expenditure. She would be better off moving her savings to a telephone account with Standard Life or Egg (the Prudential) for competitive interest rates (up to 6.5 per cent gross for deposits), and money can be moved to her current account with only two or three days' notice.

Cat's personal pension plan is held with Scottish Widows, and has received rebates from the DSS for three years. It is currently worth pounds 1,572.78 and has received no contributions since 1992. It is currently invested in a with-profits fund, which is not ideal; with 30 years to go to retirement, Cat would be better off in an actively managed equity fund.

This type of pension has been included in the second phase of the personal pensions mis-selling review, so as she hasn't already heard from them, she should contact the adviser who sold her the policy and ask for it to be reviewed. Cat is fortunate that her policy has no on-going charges, so should increase in value.

Many mis-selling problems have stemmed from excessive charges on policies like this; the charges can be so high that the fund value goes down every year rather than up.

A woman under the age of 46 is generally better off contracting out of Serps; for men the cut-off age is higher, 51, but consideration should be given to income, as it is generally not worth contracting out for annual earnings of less than pounds 9,000.

When she starts work, Cat should contribute to a pension plan, saving as much as 14 per cent of her income for a secure retirement. She should choose a plan that doesn't pay excessive commission to an adviser, can be adapted without penalty, and offers a reasonable choice of investment funds - as well as insurance in case she is unable to work, and a good investment record.

As well as her existing Scottish Widows pension, Perpetual's new personal pension may be worth looking at. And for a state pension forecast, she should complete the DSS form BR19 and send it to the administration centre in Newcastle.

Readers who would like a free financial makeover should write to Andrew Verity at `The Independent', 1 Canada Square, London E14 5DL. They must be willing to allow their name and photo to appear