- This investor wants to reduce his working hours at age 60 and have an annual income of £75,000
- He wants to give his child £100,000 in 10 years to buy a property
- He could use some of a £1.5m bonus he is about to receive to pay off his mortgage
- He should ensure that he is using all his tax allowances efficiently
Pensions, Isa invested in funds, direct shareholdings, cash, residential property.
Leave current job at 60 and work as non executive director, pay off mortgage by 60 and have income of £75,000 per year from that time, build up £100,000 over next 10 years to help child buy a property, invest £1.5m bonus.
Sean is age 46, earns £300,000 per year and has a daughter aged 16. His home is worth about £750,000 and has a mortgage of £250,000.
“I would like to retire from current job at age 60, with the mortgage paid off and a large enough amount of assets to be able to generate an income of £75,000 per year,” says Sean. “I aim to work as a non-executive director on some company boards after I have left my current job.
"My current workplace pension is worth around £121,000, and I and my employer each contribute about 3 per cent to it which, at the moment, adds up to about £21,000 per year. I also have two former workplace pensions worth about £150,000.
“I would also like to build up a fund of about £100,000 over the next 10 years to help my child buy a property when she turns 25.
“I tend keep around £25,000 in cash in addition to NS&I Premium Bonds. For a number of years, I have invested money left over after this into an individual savings account (Isa) which is managed by a financial adviser I have used for several years. The Isa is invested in funds and has a moderate risk profile.
"In in the last year, I have also invested £130,000 in direct shareholdings within a trading account. Recent purchases include Pinduoduo (US:PDD), Alibaba (HK:9988) and NIO (US:NIO). I have a personal distaste for tobacco, oil and gas, and mining stocks, although I do hold Royal Dutch Shell (RDSB).
“I am about to receive £1.5m bonus, and I wondered how best to invest it and in what. I would say that I have a moderate to high risk appetite. I am considering investing in renewable energy, green and energy efficient transport stocks."
|Sean's total portfolio|
|Holding||Value (£)||% of the portfolio|
|Professionally managed Isa||155,000||23.93|
|Former workplace pensions||150,000||23.16|
|NS&I Premium Bonds||31,000||4.79|
|First Solar (US:FSLR)||10,813||1.67|
|International Consolidated Airlines (IAG)||9,165||1.41|
|Hikma Pharmaceuticals (HIK)||8,769||1.35|
|Alfa Financial Software (ALFA)||6,973||1.08|
|Applied Materials (US:AMAT)||6,822||1.05|
|Infineon Technologies (GER:IFXX.N)||6,760||1.04|
|Marvell Technology (US:MRVL)||5,878||0.91|
|Warehouse REIT (WHR)||5,233||0.81|
|Vestas Wind Systems (DEN:VWS)||5,191||0.8|
|United Airlines (US:UAL)||4,568||0.71|
|General Electric (US:GE)||3,889||0.6|
|American Airlines (US:AAL)||3,723||0.57|
|Lloyds Banking (LLOY)||2,884||0.45|
|Royal Dutch Shell (RDSB)||2,524||0.39|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR'S CIRCUMSTANCES.
Chris Dillow, Investors' Chronicle's economist, says:
The fact that you are about to receive £1.5m should change your mindset. Together with your current assets, it should enable you to generate a £75,000 annual income – unless we all get bad luck with future returns. So your focus should be on preserving capital rather than on taking risks to grow your wealth.
This is fortunate, because recent history shows that it is much easier to avoid losing money than to make it quickly. Simple portfolios comprising a global equities tracker, UK or global government bonds, gold, foreign currency, and sterling cash have delivered steady long-term returns with little downside. You can build such portfolios at little cost with a few exchange traded funds (ETFs).
This has worked because government bonds and foreign currency have both tended to do well when equities have done badly, causing balanced portfolios to be rather stable. However, there’s a risk that history won’t repeat itself because equities and bonds could fall at the same time. This could happen if investors fear rising inflation or interest rates.
For many investors, there is a simple solution – hold more cash. One if its virtues is that it protects portfolios from correlation risk – the danger that assets will all fall together.
However, consider using some of the £1.5m you are due to receive to pay off your mortgage. Doing this would protect you from both the risk of rising rates and equity returns falling short of the roughly 3 per cent interest rate I assume you pay on your mortgage.
The problem is, though, diversification works both ways – it dilutes good returns as well as bad ones. The circumstances in which, say, Hikma and Unilever would do well might be the ones in which airlines do badly – if investors become more pessimistic about the economy and vice-versa.
So your investment portfolio is something like a tracker fund except that you’ve acquired it at more expense and in a more time consuming way. But you have avoided the error of holding high-charging funds.
It’s very easy to do this if you take a piecemeal approach to investing, for example, buying a stock that looks good now, another in a few weeks’ time and then another.
So, instead, consider what possible states of the world you want exposure to and which ones do you not. For example, if you want exposure to an environment in which investors are more optimistic about the economic upturn, hold airlines. If you want to avoid such an environment, say, because you fear investors will become more pessimistic – hold more defensives. If you want exposure to improving investor sentiment, consider speculative stocks. And if you want the opposite, avoid them.
P K Patel, client director at Handelsbanken Wealth Management, says:
A £1.5m injection of capital provides a golden opportunity to try to achieve your longer-term objectives: pay off your debts, secure a comfortable retirement from age 60 and help your daughter onto the property ladder.
You are already taking a number of very productive steps in saving, using Isa allowances and building up your pension. Your cash holdings sensibly represent around six months of expenditure at a £75,000 a year income level. And with and extra £1.5m coming in you could immediately be mortgage free.
If you are clear about your goals now and plan effectively, I believe that all your long-term goals are achievable. But to plan successfully from here some fine tuning is essential.
I would encourage you to consult a wealth planner on whether you are using all of your tax allowances efficiently. They could also perform a cash-flow exercise for you, which would assess what financial resources you will require at age 60 and by how much your capital will need to grow each year to reach this amount.
Often, the level of risk you need to take to achieve your objectives differs to the level you want or think you have to take. Despite being spread across a broad range of sectors, your trading account is relatively high risk as it is invested exclusively in equities.
Your pension savings have a significant role to play in achieving your long-term goals. Pension consolidation could be sensible, depending on the charges and underlying policy terms involved.
As a high earner, you appear to be exceeding your tapered annual allowance. This is likely to be creating a tax liability when declared on your tax return unless you have unused allowances from the previous three years. If you do have unused allowances, your £1.5m bonus could allow you to make full use of any unused allowances while gaining up to 45 per cent tax relief.
You are interested in adding more sustainable assets such as renewable energy. But a significant portion of your investments are already in sustainable assets such as technology, healthcare and pharmaceuticals businesses. The investable universe for sustainable assets is very broad and there are a wide range of options, so you do not have to compromise on financial returns.
To help your daughter onto the property ladder, you could ring fence some of the proceeds of your forthcoming £1.5m payment, for example, using a bare trust. Or you could set up one or more Isas in your daughter’s name. As she is age 16, she is entitled to both an adult cash Isa and a Junior Isa each tax year until she reaches age 18. At that point, the junior Isa would also become an adult Isa either held in cash and/or investments. Your savings goal of £100,000 could be achieved comfortably within four years, if you use her full Isa allowances each year.
When she turns 18, consider a Lifetime Isa. The government will add 25 per cent to your daughter’s savings in this, up to a maximum of £1,000 per year, and it can be used to purchase a first home.