Personal Finance: Time to put yourself first

Tim is an engineer working in the oil industry. His basic annual salary is pounds 19,600, though he is almost guaranteed to double this when working offshore. Linda is a manager working for her local health authority. She earns pounds 24,000 a year.

Both Tim and Linda are aware that their pension provision may be lacking. Tim has never been in a company pension scheme and made only modest contributions to personal pensions until 1994. Linda has accrued only six years on pensionable service within the NHS Superannuation Scheme. She has been contributing pounds 35 a month to an AVC since 1989.

Much of their spare income has been spent on privately educating their daughters, Charlotte, 20, and Alison, 18. Charlotte is in her second year at university and is being financially supported by her parents. Alison is having a year out before starting a college course in September.

The adviser: Julian Crooks, financial planner at Murray Borrill & Partners, independent financial advisers and members of the IFA Network: Moorgate House, 23 Moorgate Road, Rotherham S60 2EN (01709 371675)

The advice: Both Tim and Linda need to boost their pension entitlements. Tim can expect a pension of around 20 per cent of his earnings in real terms at age 60; Linda around 25 per cent. Retirement at 55 would reduce their pensions to 10 per cent and 15 per cent respectively.

Both Tim and Linda would like to be able to consider the option of retirement from the age of 55 onwards. They have little hope of achieving this objective. Tim does have the flexibility of part-time working. Similarly, Linda foresees the same possibility for herself. This idea makes more sense.

Tim can improve his pension in two ways. Firstly, he can maximise hiscontributions. He is currently paying around pounds 6,000 a year into pensions but could pay just over pounds 10,000. On an ongoing basis Tim can increase his pension contributions by only pounds 365 or so a month. As he will receive income tax relief automatically at 23 per cent, this will in fact cost him only pounds 281.

Secondly, he should consider paying a single contribution to use up pensions relief unused from previous years. He can go back up to six previous years and carry forward the unused relief starting with the earliest year. In the current tax year, most of Tim's 40 per cent income tax rate will be soaked up by his pension contributions. He could elect for part of his contributions made this year to be carried back to the last tax year. This could wipe out some tax at 40 per cent which has already been paid and could result in a refund of income tax.

Tim and Linda have around pounds 21,000 on instant access. This should be reduced to perhaps pounds 4,000-pounds 5,000 for short-term emergencies. The balance should be directed to Tim's pension.

As an employee, his single contribution would be automatically grossed up from pounds 16,000 to almost pounds 21,000, attracting tax relief at 23 per cent. His pension could be improved by around 90 per cent through this measure and by beginning additional monthly contributions.

Linda's contributions to the National Health Service Superannuation Scheme leave her able to contribute an extra pounds 145 a month gross, or pounds 112 a month after tax relief.

The total extra monthly pension contributions between them come to almost pounds 400. If they cannot afford this, whatever they do set aside should be split 75:25 in favour of Tim, who is proportionately more under-funded than Linda.

I would recommend that Tim consider with-profit pension plans offered by Standard Life and CGU and unit-linked plans offered by Professional Life. Linda has the option of buying added years through her pension scheme or contributing to a Free Standing AVC. She will probably find that increasing her Equitable Life AVC will be the most appropriate.

Tim and Linda have around pounds 26,000 in a range of PEPs, plus a Scottish Widows with-profits bond. The relative security of the Scottish Widows bond and Scottish Widows Safety Plus PEPs (an equity-linked PEP that uses options to ensure a lock-in of unit prices once the stock market reaches certain levels) is offset by the higher-risk Skandia MultiPep.

This PEP carries higher charges than most owing to double-charging. In addition to Skandia's own charges, the funds managed by the underlying fund managers bear their own costs. For Tim, the desired outcome is to receive returns that outweigh the effect of higher charges. The Skandia MultiPep boasts some of the most respected fund management groups. But careful fund selection is essential.

The Skandia PEP is the highest-risk part of their portfolio. It is short in overseas exposure. I would recommend links to the Fidelity North America and Gartmore European Selected Opportunities rather than the smaller UK companies' links to Schroder and Credit Suisse.

Charlotte's tuition fees are currently paid by her LEA. Her parents are helping with her living costs. The position for Alison will be slightly different. Unless she is treated as a "gap-year" student under the Government's new scheme, she will be expected to pay up to pounds 1,000 annually towards her tuition fees.

The financial impact on Tim and Linda will be most severe from September 1999 to July 2000 when they will be supporting both Charlotte, in her last year, and Alison, in her first.

LEAs can award maintenance grants to students but assess parental incomes. From next year there could be scope for seeking LEA assistance since there will be two children to maintain and "residual income" could reduce significantly because pension contributions are an allowable deduction from gross income.

If Tim and Linda do find themselves short they ought to consider using monies from their bond and/or PEPs rather than sacrifice pension contributions which are fulfilling a greater long-term need. Tax is a major consideration with the bond. They need to ascertain just how much can be withdrawn without incurring a higher-rate income tax liability.

Tim and Linda are also relatively exposed in the event of a long-term or critical illness. Linda would receive six months' full pay followed by six months' half-pay. Tim, on the other hand, is entitled to three months' full pay, with further payments at the company's discretion.

Even if Tim had reached age 50 it would not be a good idea to retire. He would have to look to accumulated capital to top up incapacity benefit for which he may qualify from the state.

An alternative is to consider income protection insurance. This would help to protect the medium-term investments and Tim's pension. If there is no long-term illness income protection insurance from his employer, Tim could consider a policy which defers benefits until 52 weeks of illness. Norwich Union would charge pounds 73 a month for a tax-free monthly index-linked benefit of pounds 1,000.

Tim and Linda also need to review their wills. They have life policies with Allied Dunbar (pounds 100,000 for Tim, pounds 50,000 for Linda) which are not written in trust and could be subject to inheritance tax. They should consider making the policies subject to appropriate trusts. Incidentally, cuts in life assurance rates mean that they could get replacement policies at a saving of nearly 30 per cent of Tim's premium and 20 per cent of Linda's.