This investor wishes to pass on assets to family and charities tax efficiently
She should reduce the number of accounts and investments she has
She should understand the tax consequences of selling any asset and make use of allowances accordingly
Isas, investment accounts and investment bonds invested in funds and shares, cash, residential property.
Spend money on travel and leisure, pass on assets to family, minimise IHT, investment return at least ahead of inflation and ideally 4% a year, simplify investments, consolidate investment accounts.
Jamiya is age 73, retired and has two financially independent children. Her own and her late husband’s NHS pensions provide her with £3,442 a month. She also receives £1,258 from a private pension and £956 state pension, per month. Her home is worth about £500,000 and mortgage free.
“I am in good physical health and, when it is safe, I would like to spend money freely on leisure and frequent travel," says Jamiya. "My income exceeds my annual expenses of about £41,000 per year, so I would like my investments to exceed inflation and to target a total return of 4 per cent a year.
“I want to pass on my home to one child after I die, and give as much as possible of what I don't spend to future generations of my family and other causes. So I would like to minimise inheritance tax (IHT).
“My husband, who unexpectedly passed away last year, had managed our finances for the past 40 years so doing this is new to me. Although my son will help me, we don’t have the time to follow a lot of information so would like to simplify my investments. My husband also held assets in many different accounts which I would like to consolidate to get a clearer oversight of the portfolio.
"Cash makes negligible returns meaning that inflation of around 2 per cent will erode my savings. So as I have a guaranteed income I am prepared to take some risk, and with up to 5 per cent of the investments significant risk if it means that they will make significant returns. If I lost 5 per cent of the value of my investments it wouldn’t affect my lifestyle negatively, but any gain would be useful for future generations of the family.
"An annual 4 per cent investment return may require considerable re-balancing of my investments. My late husband’s experience of market volatility and investment losses resulted in him being cautious, so I have a high allocation to cash and bonds. I have been advised to be more adventurous due to my secure income, and high cash and bond allocation.
"My husband preferred the UK and Europe for equity investments, but I realise that while investing more internationally maybe more volatile it may offer better returns. So I would like to divest some of my Europe exposure, and increase the Asia and emerging markets allocation while not excessively increasing risk.
"I have been advised to invest in low-cost index funds as I know little about more expensive active funds. So when I recently opened an investment individual savings account (Isa), I bought Legal & General Global Equity Index (GB00BPN60094), Legal & General Global Emerging Markets Index (GB00BG0QP489) and Legal & General Global Technology Index (GB00BJLP1W53). And as some of my existing holdings have higher charges I would be prepared to switch out of them into lower cost passive funds. But I do not want to invest in direct share holdings as I am unlikely to follow the fortunes of individual companies.
“I have also been advised to pound-cost average – drip feed money over time into existing and new funds.”
|Jamiya's total portfolio|
|Holding||Value (£)||% of the portfolio|
|NS&I Direct Saver||121,509||7.18|
|Investment Pep and Isa*||101,561||6|
|NS&I Guaranteed Growth Bonds and Index-linked Savings Certificates*||62,827||3.71|
|NS&I Premium Bonds||50,000||2.96|
|Fixed rate bond||44,015||2.6|
|NS&I Index-linked Savings Certificates||39,972||2.36|
|One Family Bond||29,858||1.77|
|With-profits investment bond||28,696||1.7|
|Capital investment bond||28,005||1.66|
|ASI Europe ex UK Equity (GB00B0LG6P37)||25,547||1.51|
|AXA Distribution (GB0006160104)||24,904||1.47|
|NS&I Guaranteed Growth Bonds||22,475||1.33|
|NS&I Direct Isa||20,309||1.2|
|Scottish Widows European Select Growth (GB0031610784)||18,624||1.1|
|Fidelity China Special Situations (FCSS)||15,372||0.91|
|Legal & General Global Equity Index (GB00BPN60094)||11,010||0.65|
|Lloyds Banking (LLOY)||8,205||0.49|
|Fidelity European (GB00BFRT3504)||7,916||0.47|
|Legal & General Global Technology Index (GB00BJLP1W53)||6,645||0.39|
|Liontrust MA Active Dynamic (GB00BCZW6844)||6,137||0.36|
|Banco Santander (BNC)||5,578||0.33|
|Legal & General Global Emerging Markets Index (GB00BG0QP489)||4,184||0.25|
|Deutsche Post (GER:DPWX.N)||3,432||0.2|
|Halifax Corporate Bond (GB0031809329)||3,239||0.19|
|Halifax UK Growth (GB0031810210)||2,951||0.17|
|Halifax UK Equity Income (GB0031810541)||2,611||0.15|
|Halifax International Growth (GB0031811408)||2,367||0.14|
*Inheritance from husband awaiting probate
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:
It is easy to both simplify your investments and cut their costs. You can have a reasonably safe portfolio that makes decent returns with just three assets: a global equities tracker in either an open-ended fund or exchange traded fund (ETF) structure, a global government bond fund - again maybe an ETF - and cash.
History tells us that portfolios as simple as this have delivered good long-term returns with low volatility. This is because bad times for equities have usually meant good times for bonds, helping to smooth returns. And because sterling tends to fall in very bad times, such the financial crisis of 2007-2009 or March 2020, we see rises in the value of overseas bonds and cash at those moments, giving us further insurance.
So putting together the core of a decent portfolio is easy. Financial advisers don’t tell you this because they want to give the impression they have expertise that you don't - which they do - but on managing tax affairs rather than investments. So consult an independent financial adviser on how to minimise IHT.
The proportion of your wealth that you should hold in equities is a matter of personal taste - your preferred position on the safety versus return spectrum. Nobody knows for sure by how much shares will outperform bonds and cash, so we don’t know how sharp the trade-off between safety and return is. As a very rough rule of thumb, I would assume that equities will outperform bonds by around three to four percentage points per year. This implies that for each 10 percentage points more that your investments are in equities, and away from cash and bonds, it would add 0.3 to 0.4 percentage points a year to expected returns. But this is a long-term average - not an expectation for the next few months.
In terms of whether should you should hold anything in addition to core portfolio I outlined above, there’s a lot'd be wary of. With actively managed funds, higher fees are a certainty, but higher returns are only a possibility. Many so-called growth assets such as new technologies or individual emerging markets should have their growth priced in so may not offer higher returns. It's true that momentum pays off but growth does not. And if you hold a global bond fund, you don’t need gold as the two tend to rise and fall together.
That said, there are possibilities to consider. Emerging markets add extra return and risk: their high returns in good times compensate for their tendency to do especially badly when equities fall. Private equity funds might give you exposure to long-run growth which listed equities won't deliver. And several investment trusts hold large defensive stocks, which tend to out perform over the long-run, on average.
Another issue is that history could be misleading. Simple low-cost diversification has worked well for years, but this might not remain the case. There is a danger, albeit unquantifiable, that interest rates in the US and UK will rise more than expected, causing bonds and equities to fall at the same time. The only effective protection from this is to hold more cash. This pays less than nothing but you have to pay for insurance.
Christian Tomaszewski, financial consultant at Timothy James & Partners, says:
We usually suggest holding 12 to 24 months' of your expenditure in cash to cover an emergency. It means that you wouldn't have to draw on your investments at what might not be a good time. You could then invest your remaining assets in line with your growth and IHT mitigation objectives.
You have so many investments that keeping on top of the portfolio would be a full-time job. And some of your cash accounts are not fully covered by the Financial Services Compensation Scheme because their value exceeds £85,000.
Consider consolidating your investments into one investment Isa, one general investment account and one investment bond, all with the same investment mandate and risk profile. And hold them on the same investment platform, It would be likely to reduce costs as platforms usually decrease their charges as the value of an investor's holdings increases.
But it might take years to consolidate all your investment accounts tax efficiently. Selling assets within Isas does not incur tax charges, but you might have to pay a penalty if you surrender a fixed-term cash Isa before the maturity date. If you sell an investment in a general investment account it may incur capital gains tax (CGT), and there might be a chargeable gain when you sell an investment bond. So it is very important to understand the tax consequences of the surrender or sale of any investments, and use of CGT and income tax allowances accordingly.
You have the financial capacity for a medium-high attitude to investment risk, but your emotional tolerance seems lower, due to your husband's bad experiences. So a balanced portfolio, of which 40 to 60 per cent is in equities, seems appropriate. An annual return of 2 to 5 per cent a year net is realistic if you are willing to take some risk.
Your broad aim is capital preservation but negligible interest rates are a problem for lower-risk assets, such as government and corporate bonds. So consider multi-asset funds which can invest in alternative assets such as gold, infrastructure or even cryptocurrencies such as the Legal & General Multi-Index range.
You could add exposure to different assets via tracker funds to help maintain your portfolio's risk profile as balanced. Also consider a few focused, top-performing active funds to aid the portfolio during periods of volatility and compliment the cheaper trackers which will deliver returns in line with the markets they track. The active funds could be focused on areas you wish to add such as emerging markets and Asia. You could make monthly contributions to these higher risk, active funds, and benefit from pound cost averaging, hopefully dampening the effect of short term volatility.
Consider selling your direct share holdings as they are volatile and don't match your risk appetite.
You have excess income of over £26,800 which you could give away as gifts which would fall outside your estate for IHT purposes. You can additionally gift up to £3,000 per year IHT free. Consider consolidating your existing investment bonds into one which can be converted into a discounted gift or loan trust. These vehicles can be effective for IHT planning and could provide more income in future if, for example, your health deteriorates.
As you are happy to put up to 5 per cent of your investments into a high risk mandate, consider an IHT mitigation investment scheme such as that offered by Octopus Investments.
As you with to specifically leave your home to one child you must outline this in your will clearly. And as you would like your son to help you manage your finances, consider setting up a Power of Attorney.