ANNETTE WILLIAMS and her children like nothing more than exploring foreign countries. They recently returned from a trip to Egypt, where they saw the pyramids and snorkelled in the Red Sea. But Annette, a 34-year-old single mother from Cambridge, knows that the family must take a break from exotic holidays for a while if she is to meet her goal of saving enough cash to cover her children’s university fees.
The cost of third-level education has spiralled in recent years. The National Union of Students estimates that the cost of doing a three-year university course is now more than £22,000. By the time Rosie, 11, and Jamie, 9, are doing their A-levels, the costs are bound to be even higher.
Annette is familiar with the struggles students face to make ends meet because she works as a senior technician in Cambridge University’s chemical engineering department.
She says: “I want to make sure that Rosie and Jamie can afford to go to university. It is my one financial worry.”
The Government has responded to the increased cost of third-level education by launching the Child Trust Fund (CTF). Parents who augment the £250 nest egg with the maximum of £1,200 a year can build a fund worth nearly £50,000 if the growth rate is about 9 per cent. But Rosie and Jamie are too old to benefit from the State’s largesse, so Annette must save enough cash herself to cover the cost of university.
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Annette understood the importance of starting to save early and has been setting aside cash for several years. However, she is disappointed with the performance of her savings. She says: “I inherited £3,000 from my grandmother five years ago. I invested the cash in Norwich Union’s UK equity fund as a stocks and shares Isa, but my investment has shrunk. It is now worth only £2,400.”
She also has £500 in Cambridge Building Society’s Sapphire account. But this instant-access account is no gem; it pays a paltry 1.75 per cent interest.
Annette’s earnings of £19,000 a year are augmented by child tax credit payments of £240 a month and family benefit of about £110 a month. “We usually go abroad once a year,” she says. “But by cutting out expensive holidays and keeping a close eye on my cash, I could invest between £50 and £100 a month towards the children’s future.”
However, holiday fun will not be scrapped entirely while Annette rearranges her finances. She explains: “The children would love to visit my brother in the Netherlands. The availability of cheap flights means that we would not have to break the bank to go abroad. But our aim is to visit Turkey in a couple of years’ time.”
Annette says that she will continue to resist the lure of borrowing to fund extra foreign holidays or to augment the family’s lifestyle.
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She owns her £150,000 terraced home outright, so she does not face the pressure of meeting mortgage repayments every month. “I am very risk-averse, so I will not take out any loans secured on my home,” she says. “We like the house and the area, so we are happy to stay here for the foreseeable future.”
One bonus is that Annette is a member of one of the dwindling number of final salary pension schemes. Many companies are minimising their pension liabilities by offering their employees money purchase schemes, which give no guarantee of pension income. But Cambridge University still offers schemes that offer a guaranteed retirement income.
Annette says: “I am in the Cambridge University assistants’ pension scheme which offers one sixtieth of my annual salary for each year I work. I have also paid to accumulate extra years to make up for those spent at home looking after my children.”
What the experts say
SAVINGS
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Anna Bowes, savings and investments manager, Chase de Vere Financial Solutions
“Annette could switch her savings into a cash mini-Isa. One of the best cash Isas available is with Halifax, paying 5.15 per cent tax-free. This offers easy access for holiday savings. By switching this money, she could earn £25.75 interest over the year, rather than £7 (assuming that rates remain static).
“With regard to saving for the children’s university fees, if Annette would prefer to save in cash rather than equities, she has a couple of options. First, she could use the remainder of her cash mini-Isa allowance; this is tax-free but will be in her name.
“She could also invest in children’s accounts in their names. Halifax has recently launched a one-year savings plan, paying 10 per cent gross a year. The maximum that can be invested is £100 a month and a payment needs to be made every month for a year. The interest earned on this account, if the maximum were invested, would be about £65 before tax.
“If Annette does choose to save in the children’s names, she must keep an eye on the amount of interest that is accumulated from their investments. If she is gifting the money, the interest will be tax-free (using the children’s own personal allowances) as long as it remains below £100. As soon as this amount is breached, the total interest is subject to tax at Annette’s normal rate (20 per cent).
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“If the money saved is gifted by others, this £100 rule does not apply and the children can enjoy tax-free interest up to their normal personal allowances.”
INVESTMENT
Mark Dampier, head of research, Hargreaves Lansdown
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“Annette seems to be eminently sensible with money. She says that she is very risk-averse, although this may be only in terms of the loan against the house. She needs to examine her risk profile for the future.
“She has invested £3,000 in stocks and shares within a Norwich Union Isa. Unfortunately, she picked a poor time for the stock market. This may well have ended up putting her off equity investment, but that would be a shame. Equity investment is one of the few asset classes that gives you a real chance to grow your money in the future.
“However, I think she would be better served in a broader-based fund. I would recommend an Isa transfer into Artemis Global Growth.
“I would suggest that before she started longer-term investment she increased her rainy day emergency fund. At present, this seems to be with Cambridge Building Society at an awful rate of 1.75 per cent. I would suggest that she move the money to a cash mini-Isa.
“For example, she could switch to Alliance & Leicester’s direct Isa, which pays 5.4 per cent tax-free. She should aim to save about three to six months’ net salary. Outside a cash mini-Isa, I recommend holding money with ING Direct, a no-nonsense account paying 5 per cent gross.
“Protection is probably more important than investment at this stage. Costs are relatively low at her age, so it should not have too much impact on her ability to save. I would suggest talks to an independent adviser.
“Annette seems to have no life cover but, with two young dependents, this is extremely important. A 15-year term assurance policy would cost £7.50 a month for £100,000 of life cover and £18.03 a month for 15 years for £300,000. For family income benefit, which promises to pay an annual income of £19,000 over 15 years, she would pay £10.85 a month.”
PENSIONS
Matt Pitcher, financial consultant, Towry Law
“It is very easy as a single parent to forget about your own finances. However, a bit of selfishness now could prevent the future from being bleaker than it needs to be.
“Annette is fortunate that she has a final salary pension scheme, as these provide excellent guaranteed benefits, and she did the right thing in buying back the years she had missed. With her work history and extra contributions, there is a chance that she could contribute up to the maximum 40 years in this type of pension scheme. This would leave her better off than most.
“The most recent published data available (2003) showed that the pension fund of which Annette is a member had a significant black hole. According to the minimum funding requirement calculation used by the Government, the fund was only funded to 89 per cent of its liabilities. This does not mean that Annette should stop paying in. She should contact the pension scheme trustees to ask for a more up-to-date picture of the fund’s finances.
“In addition, she could pay into a stakeholder pension because she is below the £30,000 earnings threshold for having a company pension and a stakeholder pension.”
Annette’s response
“I will open up a new cash mini-Isa; the rate at Halifax looks good. I want to keep a pot of money handy — in case the washing machine dies. It will also be a savings account for holidays. I will look at children’s accounts but I might not be able to afford £100 every month, even for one year.
“My experience of stocks and shares has put me off. I didn’t know that I could transfer. I will take the advice and transfer my Isa. I might open a few Isas to spread the risk. It is unlikely that I will buy life cover because it would be an extra bill and seems to pay out less than the value of my house.
“I will stay in my current pension and at the levels of payment as before. As far as I can see, it is a very good pension and other arrangements will not give more money or more security when I retire.”