The Daily Telegraph - Saturday - Money
‘Should I put £125,000 in stocks or the bank?’
Mary Hall recently lost her husband and is now in charge of the household finances. She asks Sam Benstead for help
Losing a partner later in life and taking control of the finances for the first time is a heavy and emotional burden to carry. Mary Hall, 77, is struggling with this task after her husband died in March last year. She has taken control of his pensions, worth £2,500 a month, and has £125,000 in cash split across current and savings accounts and Premium Bonds.
“We always managed our finances with a light touch. As long as we had enough we didn’t really think about it in detail. I have now got my late husband’s pensions so I know my monthly income, but I am worried that what I have in savings is earning nothing,” said Mrs Hall, who lives in Dorset.
“Every week I look at the money sections of the papers and worry that I’m not dealing with the situation.”
Mrs Hall, who is a keen textile crafter in her spare time and specialises in making quilts, owns her own home, worth £400,000, with no mortgage. Her fixed expenses are around £1,000 a month, but potentially rise to £2,000 when special occasions are taken into account. She has two independent adult children.
She wants help to make her money work without tying it up for long periods, while also making sure she has enough to pay any future care costs and any short-term emergency spending. She is also worried that some of the best savings rates come from banks she has never heard of.
“In other aspects of my life I’m reasonably competent but in this case, which has suddenly nly assumed much more importance, ance, I am completely at sea,” she said. “Please can you help?” ?”
Dennis Hall Yellowtail Financial Planning
There is no hard rule ule about how much money ney to hold as a safety buffer ffer in cash, but given Mrs Hall has a guaranteed eed income via her late husband’s pensions, having aving six to 12 months’ worth orth of spending is less important ortant than in most circumstances tances I come across.
Aside from the rainy day amount she chooses, oses, cash held over a long time is at risk from inflation quietly eroding its purchasing power. The effects aren’t immediately obvious because the initial balance increases with interest. Add 1pc annual interest and £100 becomes £101 over a year. However, if inflation is 5pc it is only worth around £96. After 10 years it’s nearer to £66.
Over long periods of time cash begins to look riskier than investing in the stock market. A common misconception among people in their late 70s is that they cannot think long-term or it’s “too late” to consider investing now. But life expectancy statistics point to Mrs Hall living another 10 years and the reality could be longer. Should she really be in cash for the next 20 years or more? I think not.
Instead, she should open an Isa: an Individual Savings Account that protects investment gains from tax.
Cash Isas pay around 1.5pc if the money is locked up for five years, but this is not enough to beat inflation and Mrs Hall wants to be able to access her money easily.
She should instead open a stocks and shares Isa, whose returns should beat inflation and from which she can withdraw her money whenever she wants.
The best way to do this is online. American fund group Vanguard offers one of the cheapest and simplest options. Mrs Hall should open an account and invest this year’s Isa allowance of o £20,000 in the Vanguard FTSE Global Globa All Cap Index fund, which invests in more m than 7,000 stocks for a very low fee. After each new tax year begins on A April 6 she can add another £2 20,000. She should do this every e year until she is comfortable with the amount she has invested and the amount she has in cash.
If technology is a barrier, there are options: either use a local independent financial adviser or ask her children to help. This leads us to the question of whether Mrs Hall will always a be able to manage he her finances herself. It would be se sensible to speak to her children about lasting power of attorney attorn so that they can step in to help her if needed in the future.
Ben Rogers and Tim Latham
Equilibrium Financial Planning Mrs Hall needn’t worry about having her cash in savings accounts that she has never heard of – all she needs to know is whether the bank is covered by the Financial Services Compensation Scheme, under which the Government guarantees her cash up to £ 85,000. This is per bank or building society, so she can have accounts up to this limit with different providers and still be fully protected.
The best deals are found by shopping around with various smaller banks outside the “big four” ( HSBC, Barclays, Lloyds and NatWest). Currently the best deal with no lock- up period is 0.65pc with Paragon Bank. She can get 1.6pc if she doesn’t touch her money for two years and 2.1pc if she leaves it for five years.
We would recommend that Mrs Hall keep between six and 12 months of essential expenses in cash as an emergency reserve, so between £6,000 and £12,000. In addition, money to cover any big spending such as work on the house, gifts to the family or holidays should be kept in cash as a safety net.
This would leave her with around £ 110,000. She should be very careful if she wants to invest the money. First-time investors tend to be drawn to stocks that have done well in the recent past but high share prices tend to be followed by big falls. Novice investors also underestimate the risk they are taking and put too much in stocks and not enough in safer assets such as bonds.
For a holding period of less than five years, we put our clients’ money into funds that hold cash, bonds and property, with nothing in the stock market. For a longer period of between five and 10 years, around half would go into stocks and the rest would be bonds and “real assets”, including property and infrastructure. The longer the investment time horizon, the more is invested in stocks.
While fund shops offer ready-made portfolios with different risk levels, we think they tend to be too risky, so would suggest that Mrs Hall seek a second opinion from a professional.