Two degrees, one pension

Tricia Allen
Age: 50
Lives in: East Dulwich, London
Occupation: Self-employed homeopath
Earns: ?13,000
Mortgage: ?50,000
Debts: Credit cards
Investments: Cash Isa and endowment
Pensions: Contributing ?20 a month
Aims: To help children through university

Tricia Allen has two children - Leo, 16, and Francesca, 19, - who rarely ask her for money: 'Both have cheque accounts: they have always had an allowance and are good at managing it.'

But Tricia, a single parent, wants to help them through university. Francesca will be studying drama at Exeter. She is taking an overdraft and the maximum student loan but no credit card.

Francesca plans to work in her holidays but Tricia does not want her to work in term time and has a scheme for repaying £2,000 a year of her student debts after she graduates. At that stage, Leo will be starting university, so Tricia will have to fund six years of debt in a row.

Tricia is a homopath, working partly from home; she also teaches homopathy to college students and works once a fortnight in a child psychology unit.

She is struggling to pay off credit card bills, though she feels the debt on her two active cards, £1,500, is under control. She has a standing order for £100 a month to repay a third. She also has £2,000 in a Coventry building society cash Isa and a critical illness policy costing £25 a month.

Her idea is to remortgage: 'The mortgage is capped for two years, but then I am thinking of extending it, taking perhaps £15,000 to help pay off some of their loans.'

She has a £50,000 inter est-only Halifax mortgage on a house worth about £250,000. A Norwich Union endowment for £90,000 will mature in 2015: 'I moved to this house a couple of years ago from a house with a £90,000 mortgage and kept the endowment policy.' With falling endowment values, at the mid-range, this should produce £70,000, which will still give her money in hand.

After that, she will use the house and endowment as part of her pension. All she has at the moment is five years' contributions to a Scottish Life unit-linked pension. For a time she paid in £100 a month but, deciding the endowment was a better 'pension', reduced it to £20. 'I am aware of how tiny my pension is, so I plan to use the endowment as a pension. I always planned to move by the time the mortgage expires so, by 65, I expect to have sold a three- bedroom house and bought a two-bedroom flat. I will then pay off the mortgage and use the endowment to fund a pension.'

Adviser 1: Joanne Cox

Financial advisers recommend planning for the future, but Tricia seems so intent on taking care of the children that she is disregarding the present.

Although she feels the credit cards are under control, she is struggling to repay them, which suggests they are not. With the advent of stakeholder pensions she should check whether her existing pension is competitive. Tricia should increase her contributions if she can, perhaps from the money saved by repaying the credit cards, but not if this would mean sinking back into debt.

The size of a lump sum Tricia can contribute to her pension from selling the house is limited by her earnings. However she could purchase an annuity outright. The disadvantage is that the lump sum is exchanged for an annual income and this can never be reversed. Tricia may prefer to invest and take an income so she still has access to her capital.

If she realised ?100,000 by buying a smaller home and received a ?20,000 excess from the endowment, the ?120,000 would provide an annual income of 5 per cent, giving her ?6,000 a year, or ?500 a month.

Tricia naturally wants to repay her children's student loans, but this is not sensible as the interest charged is considerably lower than a mortgage, and graduates repay only when they earn more than ?10,000 a year. It makes more sense to assist with monthly payments than take out an expensive loan to repay cheaper ones.

Joanne Cox works for Co-operative Bank Financial Advisers

Adviser 2: Andrew Yuill

The credit cards really should be paid off. Tricia could transfer the two active balances to cards with a low introductory rate to stop haemorrhaging interest. It makes sense to pay off the NatWest card, which is cheaper than the mortgage, rather than invest in the cash Isa. However, it would be wise to build the emergency fund up to around ?7,000 - but probably after the credit cards are sorted.

Tricia should ask herself why she wants to assist her children financially at university. They are going for their own benefit and will probably soon be earning more than her, even as new graduates. Perhaps a smaller level of regular financial assistance would be appropriate, with a reserve to provide 'treats' for the two of them.

I can see little merit in extending the mortgage, as that can only detract from Tricia's pension later and make her life less flexible.

Tricia is running a big risk with her lack of pension. Her ?20-a-month policy will not buy much, though she has the endowment of perhaps ?70,000, plus about ?50,000 from her expected house move. On current rates, a total fund of ?150,000 could produce an annual pension of ?10,000.

Tricia could consider redirecting her endowment payments to a pension plan for the tax relief. She could also consider selling her endowment policy and putting the money into a pension, perhaps a stakeholder, or partly into equity Isas.

Andrew Yuill works for PricewaterhouseCoopers

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