The Daily Telegraph - Saturday - Money
Money Makeover ‘How can I use £350k inheritance to retire?’
With property and other investments, an optometrist who is looking to scale back has many options. By Charlotte Gifford
Soaring mortgage bills and rental costs have taken their toll on households across the country. For some, escalating bills have prompted a major lifestyle change.
This is the position Manny Shah, 55, finds himself in. A renter, landlord and business owner, he has been hit by rising bills from all sides.
Mr Shah currently earns £60,000 annually from his own business – an optometrist practice – but after a jump in the office rent he has decided it is time to shut up shop.
He now plans to work part-time as a consultant before retiring fully in two years – hopefully, without having to suffer a drop in income.
An obstacle here is his private rent, by far his biggest expenditure. Mr Shah is currently paying £3,600 a month for his f lat in London’s Battersea.
“I love it here, but I appreciate it’s expensive. I would consider moving somewhere more affordable or moving to my mortgage-free house if that would help me reach my goal.”
Retiring while maintaining the same standard of living is a tall order, but fortunately Mr Shah has other sources of income that should make up the shortfall. He has a £150,000 pension pot, which should pay £155 a month.
He also has his mortgage-free home and another home with debt still attached. Both are currently let out and bring in £52,000 a year after service charges.
On top of this he has £ 100,000 invested in an Isa portfolio with the investment platform Fidelity. This includes funds such as Fidelity Japan and Fidelity China.
Mr Shah is also about to receive £ 350,000 from an inheritance.
He wants to know how best to use his windfall in order to maximise his income in retirement.
One option is to invest the money or use it to buy a third property. Another is to pay off his mortgage.
Although one of the prope r t ie s i s mor tgage- free, the other – a
£ 1.1m house in south-west London – has an intere s t- only mor tgage of £ 343,000. The mortgage payments are £ 16,000 a year. “That could go up if rates keep rising,” Mr Shah added.
He currently spends about £2,000 a month on bills – not including the rent. He has earned enough National Insurance credits on his record to qualify for the full state pension.
Chris Allen
Director of wealth planning at Arbuthnot Latham
When considering your retirement plan, cash is always the key starting point. You should have an emergency cash buffer of three to six months’ expenditure – a “leaky roof fund” if you like. Therefore, before considering using the inheritance for anything else, we would suggest putting some aside for contingencies.
When considering whether to invest the rest of the inheritance, or pay off debt, the current central interest rate base rate of 4.25pc means that any investments would need to perform particularly well in a challenging environment to “beat” what you are paying in interest.
Assuming no early repayment charges, we would suggest repaying the debt to remove the higher interest due. This would remove £ 16,000 per annum of fi xed expenditure.
The Battersea flat rent plus the debt payments are about £60,000 a year, which does not leave much room for discretionary expenditure, so this perhaps highlights a potential shortfall.
From a purely financial perspective, if the debt is repaid, it would perhaps be more beneficial to move into the property that produces the least rent, therefore, maximising the rent on the other property.
This would save the £43,200 a year in rent and cut some of the tax burden, with only one of the properties rented out.
Despite the savings made, we still see quite a shortfall at this point to reach £60,000 a year to live on, but much of the debt has been removed as has paying to rent a property.
Tim Page Money newsletter
Get the best of Telegraph Money, straight to your inbox every week
telegraph.co.uk/ moneynewsletter properties. But if he plans a simple life after retirement, another buy- to- let property may not be advisable.
Any plans he makes need to be flexible and allow him to scale back his activities over time.
Matters that are easy to manage during the active years of retirement become less so as people hit their mid70s and onwards.
A key issue is that after Mr Shah has sold the business and stopped his consultancy work, his capacity to absorb losses will reduce dramatically. So the risk he takes with his finances will need to reflect this.
Buying another buy-to-let property would mean concentrating his wealth in this one asset class, and buy-to-let is less tax efficient than it was 10 years ago.
But then again, with property values falling, it may be a good time to buy in six months or so.
Assuming Mr Shah is comfortable with the extra hassle of another buy-tolet, he may want to buy another property when the inheritance comes through and as values reduce in the next few months.
He should defer taking his pension at 55 years, as he does not need the income now and it will be taxed at his marginal rate.
Then when he has wound down his business and knows what consultancy income he will have and for how long, he can review matters.
Because he has 35 years of credits on his NI record, he qualifies for an additional income from the state pension worth £10,600 in today’s money.
He can use his £ 150,000 pension fund and £ 100,000 Isa to help bridge the gap between the end of his earnings and his state pension.
His Isa is almost 100pc invested in company shares, which he should consider diversifying into more defensive assets such as company and government bonds.
Over time, he should progressively sell down his rental properties to suit his needs later in retirement. This will also help simplify his affairs as time goes on.