The Daily Telegraph - Saturday - Money
‘How best to invest £400,000 for the kids?’
This reader wants some fun with his savings. By Sam Brodbeck
Baby boomers who have retired on the guaranteed incomes offered by “final salary” pensions are increasingly more concerned with passing on their wealth to future generations. This is the position Suresh Mehta finds himself in after a successful career in accountancy that has given him around £30,000 a year in pension income through four different final salary schemes.
Now, at 68 and still working part-time as a consultant, Mr Mehta wants to put his and his wife’s savings to work. They have £200,000 saved in self-invested personal pensions (Sipps) and £200,000 in Isas. Both are held with Hargreaves Lansdown, Britain’s biggest broker.
Mr Mehta said: “It is more than likely I won’t need this money, so I want to grow it as much as possible and pass it on. I think it’s time for a bit of pizzazz – I want to give it a go and find out what types of investments are open to me.”
Investors can now save £20,000 a year into an Isa. Pensions are more tax-efficient but have a £40,000 annual cap on the amount that can be saved into them and a £1m lifetime allowance. So, how can Mr Mehta grow his wealth while ensuring it is passed on in the most efficient way? these “active” managers are better placed to navigate the path ahead. As Mr and Mrs Mehta are both under the age of 75, they are able to make further pension contributions and benefit from initial tax relief if they currently have excess income. If Mrs Mehta is no longer working she can contribute up to £3,600 a year while Mr Mehta’s contributions will be based on his relevant UK earnings.
If Mr and Mrs Mehta need to access any of the money in their pensions or Isas they need to give some thought to the tax consequences. It may be more sensible to take money from their Isas as this will be tax-free, whereas withdrawals from their pensions in excess of their 25pc tax-free cash entitlement will typically be subject to income tax at their marginal rate. Another advantage of leaving money in pensions is that it does not count towards the estate for inheritance tax purposes, where Isas do.
Hargreaves Lansdown regularly receives positive reports about the level of service it provides, although it is relatively expensive. For their Sipp and their stocks and shares Isa account, Hargreaves Lansdown charges an annual fee of 0.45pc for pots up to £250,000. This means that for the £400,000, Mr and Mrs Mehta might be paying annual charges of £1,800. This is just the platform charge and won’t include any underlying fund charges. There may be cheaper options.
Mr Mehta can pass assets to his children and grandchildren while he is still alive. This decision should be based on whether Mr and Mrs Mehta are likely to need these assets during their lifetime. There are various gifts that Mr Mehta can make while he is still alive that won’t be liable for inheritance tax. These include a £3,000 annual exemption or £6,000 if he did not make any gifts in the previous tax year. A married couple giving for the first time could hand over £12,000 in one year. If gifts are intended to be made on a regular basis, come out of income, and do not affect Mr and Mrs Mehta’s standard of living, they can be ignored for inheritance tax purposes.
It is possible to make further tax-exempt gifts, known as “potentially exempt transfers”. The couple would need to survive for seven years after making the gift, with the potential amount of inheritance tax payable reducing on a sliding scale from year three onwards.
Mr Mehta wants to take some risks. This is fine if he has a long-term time horizon of 10 years or more, although he needs to make sure that he doesn’t take excessive risks that could potentially expose him to big losses. He should invest in shares as this gives him the best opportunity for longterm growth, but should also hold bonds, commercial property and “absolute return” funds in order to spread his risks.
It is even more important than usual
want to grow it as much as possible. I think it’s time for a bit of pizzazz’
to spread risks at the moment because it is difficult to be overly optimistic about the prospects of any mainstream asset class. Stock markets are already riding high, many bond investments look expensive and commercial property could be hit if the Brexit withdrawal doesn’t go smoothly.
A sensible allocation for Mr Mehta would be 60pc in shares, 20pc in bonds, 10pc in commercial property and 10pc in absolute return funds. If he wants to take extra risks he could have bigger exposure to emerging markets, Asia and smaller companies.
Funds he could consider include Invesco Perpetual Asian, Schroder Asian Alpha Plus, JPM Emerging Markets, Fidelity Emerging Markets, Liontrust UK Smaller Companies and Old Mutual UK Smaller Companies.
This is a better approach than holding individual shares, specialist sector funds like biotechnology, or investing in individual emerging market countries such as India.