A sunny investment outlook
Elizabeth Carless and her husband, Dave, enjoy what to many would seem a pretty idyllic existence at their home in a village near Lincoln.
The mortgage on their £200,000 house is paid off and their children have both flown the nest, but they still get to see plenty of Sophie, their ten-month-old granddaughter.
They have a nest egg of £37,000, Dave, 60, still works part-time as a driving instructor and Elizabeth, 57, is in the process of receiving a £270,000 inheritance from the estates of her parents.
The one cloud on an otherwise sunny horizon is that Elizabeth was made redundant at the end of last month from her £25,000-a-year job as an IT instructor at a college of further education. Though she received an £11,000 payoff and is drawing a local government pension of £280 a month, she is seeking another job to boost her income.
She says: “I am planning to work, probably as a freelance IT trainer, for the next five or six years. I will qualify for a state pension at age 60 but it will be a much reduced one because I have a lot of gaps in my contributions record.”
The main thing she has to decide is how to invest her £270,000 inheritance. She is ready to accept a reasonable degree of risk and is not averse to having some money in the stock market. But she is also thinking of dipping a toe in the buy-to-let market.
She fears, however, that the market around Lincoln is already saturated so she would need to look farther afield. This might be elsewhere in the UK, but she is attracted to the idea of buying a property abroad — in Portugal or Majorca.
She says: “We have been on holidays to both places and loved them. If we had a holiday buy-to-let, we could spend some time in it each year as well as letting it.
“We are even thinking that a holiday buy-to-let could be the first step towards a permanent move abroad.”
Elizabethwants to know more about the nuts and bolts of buying a holiday property, including the likely rental revenue and the costs that she and her husband would have to factor into the equation.
At the same time she wants to check that her existing portfolio of investments is on the right track. She has £18,000 in cash mini-Isas and about £20,000 in a guaranteed capital bond from RBS. The bond, which offers a return linked to the performance of the FTSE 100 index, has a little more than five years left to run.
Elizabethadmits that her pension provision is patchy. She will not receive a full basic state pension when she is 60 and there will be no future increase, other than indexlinking, in her modest local government pension. She has made a couple of additional voluntary contributions to boost her pension but says that they do not amount to very much.
She is considering making an investment for her granddaughter but is unsure what to do. “I enjoy spending money on treats for her now,” she says, “although I would consider a modest long-term savings plan of some kind.”
INVESTING THE INHERITANCE
Dennis Hall, Yellowtail Financial Planning
“I worry about Mrs Carless buying a holiday home as a first step to ‘contemplating a full move abroad’ because it would be an expensive move to retrace if her plans change. It also appears like putting too many eggs in the property basket.
“However, she is right to be thinking of income-producing investments as she approaches retirement. Assuming that she finds enough freelance work to meet her existing needs, a good starting point is to calculate how much income she would need at retirement and make investments with that figure in mind, with consideration given to the degree of risk with which she is comfortable.
“An income portfolio would ideally include a mix of asset types to spread her risk. Shares and bonds would form the lion’s share of the portfolio but with some money in commodities, commercial property and, increasingly, some hedge fund and private equity exposure.
“The core holding should come from the balanced managed sector — and the funds we favour at present are the Jupiter Merlin Balanced Managed fund, CF Midas Balanced Growth and the Neptune balanced fund. I would overlay this with smaller holdings in funds such as the JPM Natural Resources fund and the Norwich Property fund.”
OVERSEAS PROPERTY
Michael Cunnington, MJC Associates
“If Mrs Carless wants a place in Majorca, she could buy a two-bedroom flat in a complex near the sea but with an indoor heated pool to assist in getting out-of-season rentals.
“If she bought a penthouse in, for example, the north east of the island, she would be spending a total of about €415,000 (£280,000), including taxes, notary fees and other costs.
“She should be able to let it for at least 18 weeks a year, provided that she includes the summer months. I reckon she would get an average of €1,000 a week, of which she should pay 20 per cent tax and about €200 a month in community fees. She would also have to pay a letting agent 15 per cent.
“So from an income of €18,000 — after tax, community and agents’ fees — she would be left with €9,300, a net rental return of about 2.25 per cent.
“She will also be receiving a probable capital gain of at least 5 per cent a year, as well as having the use of the apartment for about half the year.
“She must use a lawyer, beware of under declaring her property purchase price and add 10 per cent to the purchase price to cover taxes and other extras.”
EXISTING INVESTMENTS AND PENSIONS
Patrick Connolly, JS&P Towry Law
“Mrs Carless has £18,000 in cash mini-Isas and about £20,000 in a Guaranteed Bond with RBS. Cash Isas are ideal for providing flexibility, especially if she needs to supplement her income. They should be retained even after she receives her inheritance money. They usually offer competitive rates and all interest is tax-free. It is important that she ensures that her accounts remain competitive and have the required level of flexibility.
“Guaranteed equity bonds appear attractive because they offer stock market returns with guarantees. However, guarantees always come at a price. This price may be the loss of some stock market growth and there will also be no dividends.
“Mrs Carless should contact RBS to find out the surrender value on her plan. Often this will be high, so it may prove prudent to retain this plan until maturity.
“She should also obtain a pension forecast from the retirement pension forecasting team on 0845 3000168 or online at www.thepensionservice.gov.uk. This will explain the current level of her shortfall and the contributions she will need to pay to make this up, plus any deadline for making these contributions.”
INVESTING FOR A GRANDCHILD
Anna Bowes, AWD Chase de Vere
“If Mrs Carless is looking to invest for the long term for her grandchild, I would suggest that she considers an equity-linked investment — perhaps a unit trust or an open-ended investment company (Oeic). Because Sophie is ten months old, she qualifies for the Child Trust Fund (CTF). Mrs Carless could add to the Government’s initial contribution — a total of up to £1,200 a year can be invested from all sources.
“If she chooses not to contribute to the CTF, there is a wide choice of alternative funds. M&G has a range of excellent funds that accept a minimum of £10 a month. The M&G Managed fund is well-diversified, investing around the world as well as in the UK.”
“It is good to have some recommendations regarding funds — it is so hard for a non-expert to choose. For example, I thought the Guaranteed Bond looked good.
“I will look closely at the named suggestions — a managed fund with a wide spread makes a lot of sense. I appreciate the tax advantages of Isas and will continue to use them.
“I have received my state pension forecast and I will look at making lump-sum pension contributions in the future.
“The hints about additional outgoings involved in an overseas buy-to-let holiday apartment were just what I was hoping for. It is good to see that, despite the outgoings, the numbers can add up. We probably won’t sell up in the UK but will let the apartment for the summer and live there for part of the English winter.
“I will look at investing a small sum of money for Sophie, but I want to have the income to do interesting things with her as she grows up. I think time is the best investment that grandparents can give their grandchildren.”
Story Courtesy of TimesOnline.co.uk
