Wealth Check: 'After the baby, will I live hand to mouth?'

The patient

The patient

Sheralyn Prenderville, 35, from Stoke Gifford, near Bristol

Job: Insurance broker for AXA Sun Life, Bristol.

Income: Basic £20,000 plus commission.

Savings: £6,000 in two Birmingham Midshires mini cash individual savings accounts (ISAs).

Investments: At least 1,000 AXA shares, plus £7,000 in an AXA equity ISA.

Goal: To achieve financial security as she is expecting her first baby in June.

The problem

Sheralyn Prenderville is concerned her finances will crumble when she has her first baby in June. She is single so there will be a slump in income during her maternity leave.

She is uncertain whether she should dip into her savings to plug the anticipated gap, or whether maternity benefits will be enough to see her through.

"I'm not sure if I should draw on my savings to help me through the first six months [after the birth]," Sheralyn says. "I'll be off work from June and I need to work out how to manage my money during this time."

She has £6,000 in two Birmingham Midshires mini cash individual savings accounts (ISAs) paying 4 per cent a year. Thanks to a share save scheme run by her employer, the insurer AXA, she has also built up a portfolio of shares in the company.

The estimated market value of her home is £185,000, and she has a £62,000 mortgage with Abbey made up of two parts. The first, a £32,000 repayment loan, is fixed at 0.75 per cent above the Bank of England base rate (currently 4 per cent) and is due to expire in June 2005.

The second part is a £30,000 interest-only loan fixed for seven years at 5.75 per cent. This deal runs out next June. When Sheralyn signed up for the interest-only portion she also took out an endowment but she later cashed this in and moved the money into an AXA stocks and shares ISA. For the past three years, she has contributed £100 a month into this ISA, which is now worth £7,000.

To cover her mortgage, she has life assurance for £60,000 with Norwich Union, due to run for 15 years. The premiums cost her £10 a month.

Sheralyn has a final salary pension scheme, which has been running for the past five years. This was non-contributory until six months ago, when she started paying in 2.5 per cent of her salary. This will double to 5 per cent in October.

As for debts, she owes £600 on an Easymoney credit card taken on as part of an introductory offer of 0 per cent for six months. But by repaying £100 a month, she is on track to clear this before the offer ends.

The cure

Sheralyn is assured of a range of benefits when her baby is born. These include statutory maternity pay (six weeks at 90 per cent of normal weekly pay, followed by 20 weeks at £100 a week); a weekly £16.05 in child benefit; and child tax credit.

Her baby will also qualify for a £250 payment into a child trust fund (CTF) when they are introduced next year, says Meera Patel, senior analyst at independent financial adviser (IFA) Hargreaves Lansdown.

Justin Modray, investment manager at IFA Bestinvest, says Sheralyn could also receive a working tax credit when she returns to her job, to contribute to childcare. "She should visit the Inland Revenue's website [ www.taxcredits.inlandrevenue.gov.uk] to see what she might get."

Savings

Ms Patel says the £6,000 in a mini cash ISA will be handy during maternity leave. Better rates are available elsewhere, however: Intelligent Finance is offering 4.6 per cent with instant access.

Property

Sheralyn could release some of the equity in her home by remortgaging, says Mr Modray. But she may incur a penalty for switching from the Abbey loan to a deal with lower rates of interest. "It's possible to find discounted variable rates in the region of 3.6 per cent - a significant saving."

Switching to an offset account that combines her savings and mortgage would give Sheralyn more flexibility as her circumstances change.

Investments

Work share save schemes are usually worth investing in, since shares are at a discount to the market price, says Mr Modray. But he believes Sheralyn should rethink her monthly contribution of £100 into the AXA fund; it should keep her on track to pay off the interest-only part of her mortgage, but she will find better returns elsewhere.

Retirement

Final salary pension schemes usually offer a generous package in retirement. "Sheralyn is in a good scheme, particularly if her contributions rise to 5 per cent," says Ms Patel. "She should continue paying in during her maternity leave and increase her contributions later if she can."

Income protection

Since Sheralyn will be a single mother, she should write a will and nominate a guardian for her child in the unfortunate event of her becoming critically ill or dying.

"In the event of her death, her pension should have a death in service benefit - which is usually around three to four times salary - and this would be paid to her beneficiaries," says Ms Patel.

Income protection and critical illness cover are important to safeguard her mortgage and income in the event of illness.

Ms Patel says an income protection policy for a non-smoker in her mid-30s would cost around £30 a month for £20,000 annual cover.

Mr Modray advises Sheralyn to check with her employer first to see if she is already entitled to long-term sickness benefits. Statutory sick pay is £64.35 a week for six months, after which incapacity benefit may take over.

Interview by Sam Dunn

If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or m.bien@independent.co.uk