It is always good to hear when any of our MoT subjects start to haul
themselves out of the financial mire. We spoke to David and Catherine Milne
at the beginning of last year, when they were struggling with the effects of
a new baby, a career change and mounting debts. Since then David has also
had to cope with six months of unemployment. But the sunlit uplands are now
coming within sight for the couple and their two children.
David’s plan to move into financial services has taken a big step forward.
After a year spent with Standard Life, he is now working for a high street
financial services group. “My ultimate goal is to become an independent
financial adviser,” he says.
Although not yet fully fledged as an IFA, he is advising clients as a tied
agent.
Even better, he has seen his basic salary jump by three quarters to £33,000.
The job also comes with a good pension scheme. In addition, David receives a
£300-a-month car allowance after tax.
The new post should go a long way to putting the Milne family’s finances on an
even keel, but David knows that there is still a hill to climb. As well as
the bout of unemployment, the family finances had to cope with some large
items of expenditure last year. Two replacement cars, one for work and one
for home, and a new kitchen added £10,000 to the not inconsiderable debts.
The Milnes had built up borrowings of £14,360 on several low-interest credit
cards when we interviewed them in January last year. However, they decided
not to follow our experts’ advice and consolidate the debt as a low-cost
personal loan. Instead, they added it to their mortgage and switched lender
before the end of their existing two-year fixed-rate period. “We had to
lower our outgoings because of my unemployment,” David explains.
They moved from a two-year fixed rate of 4.9 per cent with Halifax to another
two-year fix with Northern Rock, at 5.1 per cent in February. In the process
they raised the mortgage from £125,000 to £141,000. David says that this
reduced their monthly outgoings by about £500 a month.
However, the cost has been about £2,600 in early redemption penalties and
arrangement fees. And the couple now have another £10,000 on their Marks &
Spencer and Lloyds TSB credit cards from last year’s expenditure.
David realises that clearing these liabilities is a top priority. They will be
helped by Catherine’s income, although this is erratic because she is a
self-employed actress. On a conservative estimate she expects to pull in
about £20,000 a year.
The couple’s £8,000 Virgin FTSE all-share tracker fund Isa fell victim to the
need to pay household expenses. That meant they were unable to follow our
advice to switch to a cheaper fund and now have no emergency savings.
However, they did pursue our recommendation to review their personal pensions
with NatWest and Norwich Union. As a result, the £21,000 they had with the
two companies has now been switched to Standard Life.
The Milnes: what the experts say
MORTGAGES
David Hollingworth, head of communications, London & Country Mortgages
“It is great news that David’s determination to change career has been
successful and resulted in a distinct upturn in salary. But the changeover
period has resulted in extra debts and seen further spending on cars and the
new kitchen. It is vital that David and Catherine now remain focused as they
have some work to do yet.
“In remortgaging with Northern Rock they have incurred significant costs in
the early repayment charge. Consolidating other debts into the mortgage is
only a short-term solution to monthly cashflow constraints. It is important
that they realise that the debts have not disappeared simply because they
are part of the mortgage – the reality is they owe more.
“It is also vital not to increase the credit-card debt after the consolidation
and to pay this off as quickly as possible. Building up credit card debts,
consolidating them into a mortgage and then repeating the process is a very
dangerous cycle.
“The two-year fixed-rate deal with Northern Rock is competitive in the current
marketplace. Northern Rock’s fixes are also more flexible than those of most
of its rivals. There are early repayment charges for full repayment in the
first two years, but the deal will allow unlimited partial capital
repayments. Therefore, once David and Catherine have managed to get shot of
the credit card debt and built up something of an emergency fund, they will
be able to start repaying some of the capital on the mortgage.
“It is important that they do not leave the mortgage balance on the backburner
as it presumably remains structured as an interest-only mortgage. So while
it is great news that David and Catherine are in a more stable financial
position, they must keep grafting to pay off the debt and should try to
resist the temptation to start spending.”
INVESTMENT/PENSIONS
Justin Modray, adviser, Bestinvest
“Last year was probably not the best time for the Milnes to change cars and
buy a new kitchen. It is also disappointing to see that they have cashed in
their Isa and taken on more debt.
“The end of their Isa leaves the Milnes with no savings or investments to fall
back on. Unless David is confident he can spin out the 0 per cent credit
card borrowing, then repaying the debts should take precedence over saving.
“I suggest that he sets up a realistic monthly direct debit to repay the
balances as this removes the temptation to spend the money on other things.
Further lump sum payments can accelerate the process as and when money is
available.
“Once the Milnes are in a position to save, building up a rainy day fund in
tax-free cash Isas would be sensible. This would provide a buffer against
Catherine’s erratic earnings. Rates vary over time, but Egg currently pays a
competitive 6.05 per cent on balances of £1 and over.
“Saving longer term in a stocks-and-shares Isa would also make sense, as soon
as they have built up a cash safety net. The Fidelity Moneybuilder UK Index
is a cost-effective tracker fund with total annual charges of only 0.3 per
cent. Midas Balanced Growth provides good one-stop exposure to a wide range
of assets.
“I am glad to see that David and Catherine have reviewed their pensions: the
Standard Life pension is a sensible home for their retirement pot. However,
there are a number of funds on offer and they should think about
diversifying for future pension savings. At this stage in their lives,
exposure to global stock markets, corporate bonds and commercial property
would be appropriate. David is also fortunate to enjoy a very generous
pension scheme with his new employer.”
TAX
Paula Tallon, head of direct tax, Chiltern
“The children are eligible for the Child Trust Fund, which is available for
anyone born after September 1, 2002. The Government makes an initial
contribution of £250 plus another when the child is 7. The parents – or
anyone else – can then make additional contributions of up to £1,200 a year.
The fund becomes available to the child at 18 and is tax-free throughout its
life.
“Also very tax-efficient are the pension contributions made by David’s
employer. If the couple is considering further contributions, I recommend
that these are dealt with as a salary sacrifice arrangement, which saves on
national insurance. In addition, most employers are willing to share the
national insurance savings they make, thus increasing the attractions of
this option.
“Catherine should also ensure that a full deduction is taken for expenses
incurred wholly and exclusively for her self-employed business. She should
make sure she maintains accurate records.”
LINKS
London & Country Mortgages: 0800 9530304, www.lcplc.co.uk
; Bestinvest: 020-7189 9999, www.bestinvest.co.uk
; Chiltern: 020-7339 9000, www.chilternplc.com
Did they follow our experts’ advice? Consolidate credit card
debts? They added them to a new mortgage. Consider changing their mortgage?
Yes, but they switched to Northern Rock before the end of the two-year fix.
Look into cash mini-Isas? No. They had insufficient savings. Transfer
maxi-Isa? No. They had to cash it in to pay bills. Review their pensions?
Yes. They moved the pensions to Standard Life. Switch electricity provider?
Yes. They moved their gas and electricity from npower to Powergen.
David and Catherine’s response
“Thank you for the experts’ comments, which we found useful in reinforcing our
goals.
“Last year was an extremely difficult time financially. The situation now is
very much better, but we agree with David Hollingworth that there is still a
long way to go before we are in our ideal situation.
“Fortunately, we do not now have any large expenditure for the foreseeable
future, so we will be able to concentrate on clearing our debts and building
up some savings for both the medium and long term. Mr Hollingworth’s advice
on mortgage consolidation is very prudent. It is vital not to repeat the
cycle of mortgage consolidation.
“We will be switching to a repayment mortgage as soon as we have cleared the
debts. After that, we will be building for the future using the cash and
equity Isas recommended and keeping a close eye on our pensions. We think
that we can afford to be fairly adventurous in our approach as we still have
at least 27 years before retirement.”
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