The Daily Telegraph - Saturday - Money
Money Makeover ‘ How do I help my kids and start investing at 46?’
Bicycle shop owner Edward Clements should shift his own pension into a higher gear, writes Lauren Almeida
Watching parents struggle with financial worries is never easy. For reader Edward Clements, 46, seeing his father’s second company go bust stopped him from ever investing outside of his pension.
“My dad saw both the ups and downs of business. He was very successful, but it made me very risk-averse,” he said.
Today the family business is alive and well. Mr Clements runs a bicycle shop in Worcester, where he started working at the age of 18 with his father, Ernie Clements, who won a silver medal representing Great Britain in cycling at the 1948 Olympics.
“We’re a traditional, old- school bicycle shop. But we have struggled against the internet and big companies like Halfords,” he said.
Mr Clements’s three children, aged 10, 13 and 15, have plans outside of the family trade, including becoming a police officer and a vet.
Possible university costs have got Mr Clements considering investing. “I want to set them up with something, in case they want to study or even fall into debt,” he said. Wherever possible, he puts aside £100 per month into his children’s current accounts. With £18,680, £15,770 and £11,511 respectively, Mr Clements now wants that cash to turn into something that can support his children in the long run.
Mr Clements has no investment portfolio, apart from a pension worth £66,569. With £8,641 in cash and a salary of around £30,000, which fluctuates depending on the performance of his shop, Mr Clements also wants to improve his own financial security and prepare for retirement.
DZMITRY LIPSKY
Head of fund research at Interactive Investor Mr Clements has been extremely generous when it comes to his children, and they are very fortunate. While clearly prudent, there is a risk that he has put his children’s longterm financial comfort ahead of his own.
Collectively, his children have savings of £45,961. Given his pension is currently valued at around £66,000, I would suggest that he now pauses those monthly contributions and focuses on himself. The £ 300 he is saving per month for his children could be of more long-term use in his pension, which also comes with significant tax benefits.
If he retires at the state pension age, he has two decades over which to invest. That means he can take more risk with his pension. Good long-term investment selections could see these pots grow considerably. While taking too much risk can be reckless, it can also be reckless to take too little risk, because it means your savings are eroded by inflation.
He might like to consider adding some other options to his Standard Life Fund, such as Vanguard LifeStrategy 60pc Equity or BMO Sustainable Universal MAP Balanced Fund. The BMO range covers cautious, balanced or growth fund options, and are actively managed, targeting inflationbeating returns.
As for investing for his kids, I would suggest he looks at some global funds – assuming they go to university at 18. These are low- cost funds that spread risk globally and have a blend of equities and bonds – and these can take some of the sting out of things when the stock market gets bumpy.
The older the child, the lower the amount of equity the fund should be invested in. This is because they have a shorter window to invest before turning 18.
DOMINIC THOMAS Principal at Solomons IFA
The key is maintaining Mr Clements’s lifestyle. At the moment, his current £30,000 income is consumed by tax, pension, savings and child maintenance costs of about £ 14,450. That leaves roughly £15,550, including bills. He could increase that amount by converting his bike business into a limited company, taking a lower salary and dividends, and setting up an employerfunded pension. Looking ahead to retirement, if we assume he receives a full state pension at the age of 68 (worth £9,340 today) he needs to plug a gap of at least £6,210 a year to maintain his normal levels of income. A planner would help minimise tax when making up that gap. For example, under flexible pension rules he could draw £4,300 from his pension each year, and receive a quarter of it tax-free. He then only needs another £1,910 a year, which, if taken from an Isa, would also be tax-free.
Mr Clements still has just over two decades until he can access his state pension. But in order to keep up with inflation, he needs to achieve returns of at least 2.5pc on his own investments. His current pension has a very high allocation to cash-like returns, which will not help.
He needs to rethink this. The wrong asset mix is like being the wrong gear. Luckily, it is a lifetime journey, and he has ample time to ride out market volatility.
This applies equally to his children’s savings for university. They will likely need funds at 18 – but not all at once. Again, he should consider moving out of cash and opening investment Junior Isas.
With regard to the bicycle shop, Mr Clements should prepare for the worst- case scenario, where his children do not want to take it over.
He could prepare the business for sale, doing so when he wants to rather than when he needs to. In that case, an adviser would be able to identify the sum needed to solve his income shortfall (around £200,000 by age 67).
Alternatively, he could grow the business so that it could afford to pay him £ 6,210 a year as a net income while others do the work. But he should be aware that this route carries with it a certain degree of risk.