The Daily Telegraph - Saturday - Money
‘How do we invest £600,000 with zero risk?’
David and Ruth Jones also want to spend £20,000 a year on travel in retirement. Melissa Lawford seeks expert advice
David Jones, 58, and his wife, Ruth, 54, have decided to take advantage of the property boom and sell their detached 1930s house in the West Midlands while the stamp duty holiday is firing up house prices.
They had agreed to sell their home for just over £600,000. The sale has just fallen through but they hope to find another buyer for a similar price, sell up and rent locally until they can downsize to Shropshire when they have both retired. Mrs Jones, a teacher, retires this summer while Mr Jones, a GP, has 15 months to go.
They have almost paid off their mortgage and plan to spend £300,000 to £400,000 on a lower-maintenance property. They have two questions. “In the short term, how do we invest the £500,000 to £600,000 from the sale for a year until we are ready to buy again?” asked Dr Jones. “And longterm, how should we invest to enjoy retirement? We want to do a lot of travelling – we have friends in Australia who we want to visit.”
Dr Jones has an NHS pension that is worth about £50,000 a year, with a £140,000 lump sum. Mrs Jones has invested £30,000 into a private pension. They also have £80,000 invested in a portfolio with Fidelity. They would like to have a monthly income of £5,000 and want to budget £20,000 a year to go travelling.
Paul Derrien
Investment director at Canaccord Genuity Wealth Management: Bearing in mind Mr and Mrs Jones’s relatively short-term rm timescale and the fact that they cannot take any risk on the money y for the new property, the safest st option is to park the funds in bank or building society accounts. ccounts.
Many of the well ll known high street banks are offering rates of 0.01pc, pc, but some less well known names offer rates es of about 0.65pc ( so a return of £3,900 on £600,000).
They should connsider limiting the he amount that they y d e p o s i t w i th h each institution to £ 85,000 to ensure they are
David and Ruth Jones, below, plan to do a lot of travelling, including visiting friends in Australia protected under the Financial Services Compensation Scheme in case their chosen deposit taker goes bust.
The couple should ensure they make use of their 2020- 21 and 2021- 22 Isa allowances, which means they could shelter £80,000 tax free by April 2021. They should also consider that Mrs Jones puts the majority of the savings in her name, as she is likely to pay a lower rate of tax on her earnings as a teacher than her husband as a GP.
The potential for £600,000 from the sale of their house, and outlay of only £400,000 on a future property, means that they could consider investing some of the excess into riskier, longer-term investments. Adding to their existing Fidelity portfolio could be a good starting point, but the returns of 2pc to 2.5pc look disappointing.
They should check if the Fidelity account allows them to buy direct investments. Vanguard offers several low-cost LifeStrategy funds with a range of risk levels, which could be combined with something like the Liontrust Sustainable Future funds. They could then decide what percentage of their investable cash they wanted to allocate to the stock market. They could release money out of these funds quickly if the need arose.
Finally, they may consider buying some bonds. The returns are unlikely to be much higher than on cash deposits but if they were to use their Isa allowances to protect the income from tax there are investments such as Severn Trent Index Linked 2022 bond, which will return 1.3pc abo above the retail price index to maturity maturity, or Lad brokes 5.125pc 2022, w which will pay a return of around arou 2.5pc. These are retail bond bonds and not “minibonds”, whic which are riskier and much harder harde to sell.
Michael Micha Martin
Dr Jones’s £50,000 in income from the NHS pension will n net him roughly £ £42,000 a year. He H and his wife are loo looking for a total of £ £60,000 60 a year net in retire retirement ( expenditure and £20,000 travel money). This means they have a shortfall of £18,000 a year. The funds we have to fill this with are: £ 200,000 from downsizing, £80,000 with Fidelity, £140,000 in taxfree cash and Mrs Jones’s pension fund of £ 30,000. This gives them a total of £450,000.
I would like to claw some tax back for the couple. Normally pensions are a great starting point but in the Joneses’ circumstances they will have pension lifetime allowance issues already and any additional pension income generated would be taxed at 40pc.
I would consider an investment of £100,000 into a venture capital trust, which will give £30,000 back in income tax relief and a nice tax-free income. Let us assume this generates 4pc – £4,000 a year on a £ 70,000 net investment (a large caveat: only look at VCTs after taking formal advice, as they are risky investments). Mrs Jones’s pension, if invested wisely, should provide 5pc, or £1,500 a year. This is below the personal allowance, meaning there is no tax.
So this leaves us with £350,000 to achieve the £12,500 a year of income shortfall. With these numbers in mind they need a return of only 3.5pc. I would just choose a couple of diversified managed funds, which should give them the returns they need in the form of capital gains. They will not have to pay tax on this return as the income required is below the combined capital gains tax allowances.
A further caveat: there may well be imminent changes to capital gains tax. I also expect more pension legislation changes. Any investment structure considered now should be looked at through three lenses: what will it do for me now, what could potentially change, and how would that affect my financial life?
Whenever you invest, you should be thinking: “How will I get my money back?” This is why a VCT investment should be looked at very carefully.
Then, see how the income and holidays go for the next five years. I hope that the couple will have built up a surplus. With that, they could choose to increase their holiday budget and have some more fun.