Accident windfall sparks bright plans

OLIVIA ROBINSON

AGE 25

LIVES IN Reading

OCCUPATION Mature student

EARNS Grant, rent and vacation work

MORTGAGE £81,000

DEBTS Credit card, bank loan, student loan

INVESTMENTS Peps to cover mortgage

PENSIONS None

AIMS To best use insurance compensation

Olivia Robinson was injured in a boating accident two years ago. At a summer party on the Thames, the engine exploded and she lost her hair, eyebrows and almost her sight. She has now made a complete recovery with no long-term effects, and six weeks ago received an insurance payout of £3,500.

She based her case on American lawsuits and won this amount not as a reflection of the mental stress, or for the risk to her sight but, oddly, for the vanity of losing her hair. She now wants to know what she should do with the money: 'Do I pay off my debts or invest it for the future?' Before returning to university, she had spent five years working in web design, office management and IT training. Part of the time she was self-employed, running a business doing research to help companies expand. More recently she was TEFL trained and has taught in the UK and abroad.

She has toured Europe and spent a year travelling across Russia, China and South East Asia. She spent last summer teaching in Thailand.

The TEFL training renewed her interest in linguistics, which she is now studying at the University of Reading. She graduates next year and says her job prospects are good.

Last October she bought a house for £95,000. As she was a student, her father guaranteed the interest-only fixed-rate mortgage. She has lodgers paying £5,280 a year in rent, which supplements her £1,800 grant and £2,350 from working in the holidays.

The mortgage costs her £4,400 a year; she has a £1,000 bank loan, a £1,000 credit card balance and a £3,600 student loan which is due next June. Her investments are £4,000 in Peps: Invesco European Growth, Baring European Growth, Credit Suisse Fellowship Fund.

She hopes to work for the teaching publications arm of a publishing house and eventually set up her own business: 'I was happy with the process of running a business. I know I have a strong head for business, but I want to see if I can combine my personal interests with business rather than running a business for its own sake.'

She wants to work from home and will also build her own house abroad, probably in France, using the internet to communicate with customers: 'I have been researching it for a few years and done some preliminary costings and I have definite ideas about what I want. I still want to travel but as long as I can have a room full of computers I will be happy.'

Adviser 1: Neil Bailey

Olivia should repay the bank loan and credit card bill, as the interest rates are higher than she is likely to get from investments. She should keep the balance as cash for expenses between now and when she graduates. She could open a mini-cash Isa for tax-free interest. An instant access or short notice account will give her flexibility. Nationwide is a good 'high street' provider, although better rates are available. Smile's Cat-standard Isa pays 7.25 per cent with instant access.

Olivia should ensure she is claiming all her tax reliefs: under rent-a-room, she can make £4,250 a year from a lodger before paying tax.

Although she has £4,000 in a Pep, Olivia does not appear to be making ongoing contributions to her mortgage - perhaps to reduce monthly commitments while studying. Her mortgage comes up for review around the time she graduates. She should review the repayments then. Her bank will probably offer a range of options, but other lenders will only consider an application after she has been employed for three to six months. She should wait until she can shop around before locking herself into another mortgage deal.

Olivia does not mention mortgage protection arrangements. I assume she has no dependents, but she should consider a critical illness policy, that will repay the mortgage if she suffers a a serious illness.

• Neil Bailey works for Winslow-based Sensible Financial Planning.

Adviser 2: Carolyn Corless

Olivia should pay off most of her debts as she is paying far more interest than she could receive from deposit accounts. Investing in the stock market could provide a higher rate of return, but it is in no way guaranteed and she could lose money in the short term. She should check if there are any onerous penalties for repaying the bank loan early. She should retain her student loan, though, as this is a cheap form of borrowing.

After paying her mortgage there is only a modest amount left for living expenses and she currently has no emergency fund for unplanned expenditure. To avoid building up debt again, I recommend she invests the £1,500 left in a bank or building society account paying the highest rate of interest. Accounts operated via the internet offer some of the highest rates (for example Nationwide e-savings pays 7 per cent gross on a minimum balance of £1); postal or telephone accounts are competitive traditional accounts (C&G Tracker account pays 6.5 per cent gross on a minimum balance of £100).

There is little benefit investing in a notice account and Olivia is likely to need regular access to the capital to meet occasional shortfalls.

With careful budgeting, this modest nest egg should enable Olivia to complete her degree, without incurring any additional debts.

• Carolyn Corless works for Bideford-based chartered accountant Sully & Co.

• Advice is for guidance only.

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