‘I can’t work – do I have enough to retire on?’

Musician John Cheney has a modest pension and a rental property but a lack of gigs ruined his plans. By Sam Benstead

Tpandemic has uprooted the careers of millions in the past year but self- employed people who cannot work from home have been among the worst affected.

For musician John Cheney, 62, from West Sussex, not being able to play live shows has been devastating because it came at a time when he was gearing himself up financially for retirement.

“I was playing music at care homes before the pandemic but that has all collapsed, leaving me with no income. Gigs are starting to appear again as the weather gets nicer and vaccines start working, but I am nowhere near close to making what I did before,” he said.

Mr Cheney has a £100,000 pension with Aviva. However, he can now save only a maximum of £4,000 a year into his retirement pot because in 2019, on the advice of a financial planner, he took a lump sum from the pension as he needed some extra money. This activated the “money purchase annual allowance”, which caps annual pension savings at £4,000 rather than the £40,000 he could save before.

He and his wife also have stocks and shares Isas worth £ 5,000 each and £3,000 in Premium Bonds. The Isas are invested in fund group Vanguard’s popular LifeStrategy 60pc Equity fund.

While relatively cash poor as he nears retirement, Mr Cheney is asset rich as he owns two properties without mortgages. The first is his primary home and the second is a rental property worth £280,000, which generates £1,000 a month income. He has no other debts and can afford to save £200 a month into an Isa.

In retirement, Mr Cheney and his wife expect to live on about £2,000 a month before treats such as holidays abroad are taken into account.

“I currently pay a financial adviser a 0.5pc annual fee but feel I have been short- changed because I was not warned about triggering the MPAA. I want to take matters into my own hands,” he said.

“Also, I am not sure whether I should sell the rental property. And if I do, what should I do with the money?” proceeds into the Isas and his Sipp.

While the rental income yield of 4.2pc from his property is good, this figure on its own hides some of the risks associated with owning it. For example, missing just two months of rent in a year would reduce this yield to 3.5pc and upkeep costs could rise more quickly than the value of the property.

Another problem with a rental property is the lack of diversification, as a large amount of wealth is tied up in one asset. If interest rates start to go up, and some economists expect they might to control inflation, this could put the brakes on house price growth as mortgages would become more expensive.

I recommend he takes advantage of the property boom fuelled by the stamp duty holiday and sell it.

‘Covid forced me to stop playing music shows at care homes, leaving me with no income’

This is also an opportune time while Mr Cheney’s income is low because capital gain tax varies according to income. If he earns less than £50,000 a year he would pay 18pc tax on any gains rather than the 28pc rate applied to higher earners after the capital gains tax allowances of £ 12,300 each have been deducted.

Mr Cheney should maximise his £4,000 Sipp allowance and then use his and his wife’s £20,000 Isa allowances. Whatever is left over should go into a general investment account alongside the additional £200 a month Mr Cheney can afford to save.

A general investment account has no upper limit on how much can be held, although capital gains of more than £12,300 a year are taxable. Given that the pot would be less than £250,000 once sale costs, tax and the Isa and Sipp contributions were taken into account, investment gains would be unlikely to trigger capital gains tax if he used his and his wife’s allowances and invested in a low-risk fund.

He should then repeat the funding into the pension and Isas annually. I am confident that this would give him enough to retire on given his modest outgoings.

Jason Barefoot

Financial planner at Ascot Lloyd

The proceeds of the property sale should be invested with the aim of keeping up with inflation and any increases in life costs once Mr Cheney retires.

He is currently invested in the Vanguard LifeStrategy 60pc fund, which is split 60:40 between stocks and bonds. This should do the trick, but if he could tolerate a bit more volatility he could do better by owning more stocks.

Global stocks have returned around 5pc a year after inflation since 1900, according to research from Credit Suisse, the bank, while bonds have made 2pc. I don’t know what the future holds but I do believe that stocks will make more than bonds as long as an investor can stay disciplined and weather the natural ups and downs of the market.

A condition for owning more stocks should be that he keeps two years’ worth of living costs in cash to cover short-term expenses. Premium Bonds are a good idea in this regard as they have an effective interest rate of 1pc but are readily accessible. This would mean that if stock markets suddenly dropped he would not have to sell any investments at the bottom of the market to raise money.

The Vanguard LifeStrategy 100pc Equity fund is one option. It owns stocks from around the world via multiple tracker funds. However, since the LifeStrategy fund has a high weighting, around 25pc, in British stocks, it is more risky than the Vanguard FTSE Global All Cap Index fund, which simply buys stocks according to their size.

Stocks are volatile though, with a global index normally trading in a positive or negative 16pc range every year, with 50pc swings possible at extreme times such as the 2008 crash.

Mr Cheney must be disciplined during market falls and use his cash buffer for everyday income, rather than his investments. If he cannot stomach the thought of a 50pc temporary decline in the value of his investments, having a 100pc stock portfolio may not be suitable. If he can, this would be the best way to grow his money and fund his retirement.

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John Cheney used to earn a living playing music in care homes