The Daily Telegraph - Saturday - Money
‘Will the taxman claim my £400k?’
Retirees wanting to pass on wealth to their children must fight tax grabs and coronavirus, says Marianna Hunt
Peter Kolb, 69, and his wife, Mary, 68, have watched their retirement savings fall by 20pc since the coronavirus pandemic shook stock markets. They are keen to boost their pot so they can enjoy life to the full once lockdown lifts, but also want to make sure they can leave something for their children and grandchildren.
The couple has £112,000 invested globally in a mix of funds, around £140,000 in bonds and £60,000 in cash savings. They have paid off the mortgage on their £400,000 home in Surrey and receive pensions that pay a guaranteed income of around £45,000 a year.
Mr Kolb also has almost £100,000 invested in a mini-bond firm. This money is being used to develop properties and pays a 4pc yield.
“We’ll need more income on top of our pensions so we can enjoy the time when we can see our family again. We’re already planning cruises and other holidays. I also don’t want them to be shelling out thousands in inheritance tax [IHT] when I’m gone,” said Mr Kolb, a retired psychological therapist.
“My wife is concerned I’m taking too much risk with our savings,” he added. “I don’t know if we should sell l our funds and choose some others in the hope our investments go back ck to the level they were at before – but maybe that is too hopeful givenn the market at the moment.
“We also feel like we shouldld do something with our cash savings, avings, which are earning just 0.3pc.” pc.”
TOM KIMCHE, OF FINANCIAL NANCIAL PLANNER NETWEALTH,ALTH, SAID:
Mr and Mrs Kolb shoulduld first consider how much of their savings to hold
Your main financial goals (in as much detail as in cash. They receive a guaranteed pension income each year, so it is likely they do not needne to hold as much in cash as theythe do now.
Perceived wisdomwisd is to hold six months’ worth ofo whatever amount of moneyoney they draw from their investmentsnts in cash. In the event of another market downturn, they should use this cash instead of taking income from their portfolio. This gives the investments time to recover rather than forcing them to sell assets at their lowest value.
Whatever the level of cash they decide to hold, it need not earn such a low return. At the time of writing, it is possible to earn up to 1.16pc a year on an easy-access savings account.
Although not always advertised as such, mini-bonds are high-risk investments, which is why they offer rates of return so much higher than those available from savings accounts. By holding almost a quarter of their wealth, not including their home, in mini-bonds, Mr and Mrs Kolb may be exposed to more risk than they think. There is not always a secondary market for mini-bonds, so they may be better off moving the money into some low-cost global stock funds.
If they did this and then moved, say, £12,0 £12,000 of their cash into a savings accou account with a higher interest rate and in invested the rest, they would have a port portfolio worth around £400,000. Mr an and Mrs Kolb could withdraw £1,00 £1,000 a month – increasing by 2pc ea each y year roughly in line with inflation – foror for 2 25 years and still have £324,000 remai remaining.ining. This combined with their Surre Surreyey home wouldw be a valuable nest
egg eggg to pass on to their children.
Although not always advertised as such, minibonds are high-risk and can be hard to sell
TTIM HOLMHOLMES, OF FINANCIAL A ADVISER SALISBURY HOUSE W WEALTH, WEALTH SAID:
Al Althoughlthough Mr and Mrs Kolb’s inve investmentsestmen have dropped by 20pc since the Covid-19 outbreak, markets are al alwayslwa rising and falling. They do not ne needee all of this money today, so this is not a time for them to panic and selll sell oou out at a loss.
TTh They should, however, make sure ththeir their portfolio is aligned with their “risk tolerance” – how much money they c can lose without their plans being turned upside down. If they want to use their investments to gener generate income and leave a chunk to the their children, then their risk tolera tolerance might not be as high as they t think.
If t they want to reduce risk, they could invest less in stocks and use funds that protect the value of their savings by trying to match inflat inflation – these are sometimes known as “absolute return”. This will mean sacrificing higher returns, so they need to decide what is more important: protection or taking a chance increasing their savings.
I suggest they leave the money invested in stocks, as they are still at the start of retirement and will need returns to generate income that rises with inflation. They should move their cash savings into premium bonds or bank accounts paying the best easyaccess rates. The level of cash-based savings is a personal decision, but I think that the current level is about right.
They could withdraw approximately 4pc from their portfolio each year and still have enough to leave around £300,000 to their children. If they need extra funds for holidays when we can travel once again, they should use some of their cash savings and then replenish it as the investments return to a level they are comfortable with.
The Kolbs should make sure all the investments are in tax-efficient accounts, such as Isas. There are various ways that Mr and Mrs Kolb could reduce the impact of IHT, but at present they are not liable to pay it, so long as they leave their main residence to a direct descendant.
A married couple passing on wealth in this way can now leave up to £1m tax-free between them. They should check their wills are up to date and put in place Power of Attorney arrangements for each of them.