Saving for a brainy day

Vivienne wants her kids to have cash after college, she tells Margaret Dibben

Dave and Vivienne Hemming

Ages: 39, 40

Live in: Wallingford

Occupation: scientific information officer and part-time company secretary

Earn: £72,000 together

Mortgage: £94,000 outstanding

Debts: none

Investments: Isa and bond for children, endowments

Pensions: company pensions

Aims: to invest children's inheritance

Dora and Rhys Hemming, aged five and two, recently inherited £1,000 each from their great-grandmother. Their mum, Vivienne, wants to know how best to invest it for them. She wants to tie the money up for a long time - perhaps until they are 25 and buying their first homes - but does not want it to get swallowed up in the cost of going to university, which she and Dave want to meet themselves.

They have already started saving so each child will have a lump sum when they are 18. Vivienne is paying £25 for each of them into a children's bond with Scottish Friendly. Dave pays £50 a month into a FTSE tracker Isa with Scottish Widows.

But Vivienne thinks this may not be enough to meet the cost of university and is considering using money from their Australian-style Virgin Direct mortgage to invest further. 'We originally borrowed £120,000 and pay in our salary so the amount we owe has come down.' The sum outstanding varies through the month as they pay bills from the current account attached to the mortgage but they now owe around £94,000.

Vivienne wants to know if they should keep their mortgage down or take it back to £120,000, using the extra for investment.

They have three endowment policies maturing in between 10 and 15 years and all are on track to produce the amount expected. The total will be less than their current mortgage so the difference will be covered with term insurance.

Dave has a final salary occupational pension and Vivienne belongs to a money-purchase scheme, both have employers' contributions as well as their own and four-times-salary life insurance. Vivienne considered moving two pensions away from previous employers but didn't because she feared the cost of advice on doing this would soak up any gain. She does not have a full employment record, having taken time off when she had children, so she could make up back contributions.

Adviser 1: Julie Lord

Saving at least the child allowance is a good idea. Investing £50 a month for 13 years generates about £12,500 if growing at 7 per cent a year.

The mortgage will be repaid on death but not on diagnosis of a critical illness which is more devastating financially.

There is no mention of income replacement or ill-health pension if either were unable to work due to accident or sickness. There is no point investing if all the investments need to be used after a catastrophe.

Currently the best option is to reduce debts rather than invest but I suggest they start regular investments to buy cheap units now in the hope of an investment recovery.

Vivienne is a higher-rate taxpayer and they both ought to have Isas.

As Dave has a tracker fund, Vivienne should choose one actively managed, perhaps a globally invested fund.

With the children's money being invested for more than 20 years, I suggest a global blue chip equity unit trust, which should ensure diversity but low risk. It should be in Vivienne's name but designated for each child so it is clearly earmarked as the children's.

Vivienne should consider increasing her pension contributions to make up for lost contributions. I suspect it was not the 'advice' that was expensive so much as the initial charges and commission payable on transfer. Advice from a fee-based planner on small amounts should not be expensive.

Julie Lord is a certified financial planner with Cavendish Financial Management in Cardiff

Adviser 2: Sharon Linnard

Children's investments, such as Henderson's Jump and Invesco's Rupert Children's Fund, are equity-based which can be volatile but have the potential for long-term capital growth. As the money has not come from the parents, income and capital gains are the children's own. At 18, the investments can be in the children's names.

Investing the difference between the original mortgage and the current balance is not appropriate. It is important to strike a balance between repaying the mortgage, as they are, and investing part of their surplus income. They earn less interest from cash deposits than they pay on the mortgage so if they do invest this money it should be in equity-based, tax-efficient investments like Dave's Isa. They should add to this and start another for Vivienne.

The more they reduce the mortgage, the larger surplus they will have when the endowments mature. They could pay university fees by drawing down on the mortgage which would then be repaid from the surplus on the maturing endowment policies, which coincide with the university fees.

As Vivienne is in an occupational pension scheme, she could increase contributions to a maximum of 15 per cent of her salary, with higher rate tax relief, to give more money at retirement.

Dave is in a final salary scheme which provides excellent value.

Their mortgage allows payment holidays which is useful if either was unable to work for a time.

Sharon Linnard works for accountant KPMG.

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