- This investor needs to cover living expenses of about £40,000 a year and also wants to make financial gifts to her children
- Her aim of an annual total return of 10 per cent a year is unrealistic
- She could simplify her investments by holding a global equities tracker fund alongside a few active funds
Isa, Sipp and general investment account invested in funds and direct shareholdings, cash, holiday rental business, residential property
Cover living expenses, mortgage payments, business expenses and youngest child's university expenses, in total about £40,000 a year; give children £100,000 for deposits to buy home, give assets to family tax-efficiently, cover possible care costs, take 2-3 per cent a year from investments – at least £50,000 a year for next 13 years, 10 per cent annual total return, manage own investments and reduce costs of investing, minimise time spent managing investments
Jane is age 60, divorced, and has five children between the ages of 19 and 35. She lives off income from her investments and a holiday rental business abroad, which made a turnover of €28,034 (£23,408) in its first year of trading in 2020. The business is valued at €650,000 and has a fixed-rate mortgage of about €434,000 due to end in September 2035. Jane makes monthly repayments of €2,941. Her own home is worth about £2m and mortgage-free.
“I and my ex-husband have shared equally the cost of our older children’s university education and I will also contribute £9,892 a year towards the cost of my youngest child's first degree for the next three years, and share equally the cost of her Masters degree after this. I have also given three of my children £50,000 each towards a deposit for a first home, and am going to give this amount, or more if inflation rises, to the other two.
"I would like to pass on as much as possible to my children and any future grandchildren, incurring as little tax as possible. But I also need to preserve capital for my own needs, including possible care costs in later life.
"I aim not to touch my self-invested personal pension (Sipp) until I am age 75. Every year, I contribute £2,880 to my Sipp and £20,000 to my individual savings account (Isa).
"I expect to start receiving the state pension when I am age 67. And I would like to draw 2-3 per cent of the value of my investments, both by taking dividends and selling capital, while still growing the overall capital value. Is this a sustainable level of withdrawal?
"The business's mortgage payments and expenses come to around €15,000 a year, and I cover about half of the mortgage payments with rental income. I estimate that my outgoings in total come to around £40,000 a year. But I want to work out how much I can afford to live on from my investments, rather than continually cutting spending.
"My investments are run by a wealth management company, but I think that its fees are too high. The high fees, an allocation to bonds and holdings in poorly performing shares have been a drag on performance. My return, net of fees and withdrawals, has been 27.3 per cent over the past four-and-a-half years. But I would like to make an average annual total return of 10 per cent, via capital growth rather than income.
"So I wish to run my investments myself to pay less in fees. I want to hold around nine to 10 investments as I read that this is the most one can realistically monitor. I don't want to trade regularly, and want to make investing as simple as possible to avoid time constraints and stress. Essentially, I want to outsource the selection of investments to fund managers.
When I appointed my wealth manager in 2017 I was categorised as having a medium risk appetite, so some of my investments are in fixed interest. But I want to adopt a high-risk approach and be invested fully in equities as I believe that over the long term they outperform other investments. Inflation, meanwhile, means that cash is losing value.
"I would be prepared for the value of my investments to fall up to 50 per cent in any given year. I held equity investments during market falls in 1987, 2008 and 2018, as well as at present, and have never sold. That said, when I was married I had another income, which I do not have now, so I will have to sell investments worth around £50,000 each year until I pay off my mortgage. It would be good to buy equity investments when markets are down but one can never gauge the bottom of the market and I am concerned by the current volatility.
"I want to balance the exposure to the US with European equities, but am uncertain about emerging markets.
"I am considering investing via active open-ended funds, exchange traded funds (ETFs) and a few investment trusts, including a private equity trust. But I do not want investment trusts to account for more than 10 per cent of my investments because they can borrow.
"I will gradually reduce my direct shareholdings over the next few tax years. Although some of them are trading at a loss, if I sold all of those held outside Sipps and Isas in the same tax year I would incur a lot of capital gains tax."
|Jane's investment portfolio|
|Holding||Value (£)||% of the portfolio|
|Vulcan Value Equity (IE00BL9XBP89)||70,030||3.23|
|LF Blue Whale Growth (GB00BD6PG787)||69,284||3.2|
|Polar Capital Technology Trust (PCT)||63,972||2.95|
|PrivilEdge - Sands US Growth (LU0990497157)||63,166||2.92|
|Fundsmith Equity (GB00B4MR8G82)||62,012||2.86|
|NB Private Equity Partners (NBPE)||61,176||2.82|
|SVS Church House Investment Grade Fixed Interest (GB00B11DPK96)||60,994||2.82|
|BlackRock European Dynamic (GB00BCZRNM23)||60,512||2.79|
|Meta Platforms (US:FB)||57,897||2.67|
|CG Absolute Return (IE00BYQ69B30)||53,960||2.49|
|Sands Capital US Select Growth (IE00B8J58X03)||50,138||2.31|
|Rio Tinto (RIO)||48,547||2.24|
|Marshall Wace TOPS UCITS (IE00B90M6J99)||45,165||2.08|
|Smithson Investment Trust (SSON)||43,695||2.02|
|CG The Dollar (IE00B41GP767)||43,385||2|
|Brown Advisory US Smaller Companies (IE00B5510F71)||42,777||1.97|
|Baillie Gifford Japanese Income Growth (GB00BYZJQL25)||40,966||1.89|
|M&G Optimal Income (GB00B1H05601)||39,981||1.85|
|Findlay Park American (IE0002458671)||38,978||1.8|
|Rathbone Ethical Bond (GB00B77DQT14)||38,224||1.76|
|NB Private Equity ZDP 2024 (NBPS)||34,950||1.61|
|3i Infrastructure (3IN)||33,233||1.53|
|Polar Capital North American (IE00B718SY19)||33,243||1.53|
|Allianz Gilt Yield (GB0031383390)||32,920||1.52|
|Finsbury Growth & Income Trust (FGT)||29,185||1.35|
|Royal Dutch Shell (RDSB)||28,257||1.3|
|Prusik Asian Equity Income (IE00BBP6LK66)||27,424||1.27|
|Croda International (CRDA)||27,300||1.26|
|Vontobel mtx Sustainable Emerging Markets Leaders (LU2066060539)||24,534||1.13|
|Monks Investment Trust (MNKS)||23,760||1.1|
|iShares Global Inflation Linked Govt Bond UCITS ETF (SGIL)||23,689||1.09|
|Polar Capital Global Healthcare Trust (PCGH)||23,560||1.09|
|Pantheon International (PIN)||23,170||1.07|
|PIMCO GIS Dynamic Multi-Asset (IE00BYQDNG76)||23,104||1.07|
|Federated Hermes Unconstrained Credit (IE00BK80KJ05)||22,564||1.04|
|Worldwide Healthcare Trust (WWH)||21,360||0.99|
|St James's Place (STJ)||20,953||0.97|
|Royal London Sterling Credit (GB00B4W1ZT22)||20,756||0.96|
|JPMorgan Japanese Investment Trust (JFJ)||20,466||0.94|
|Invesco Global Targeted Returns (LU1218207147)||19,318||0.89|
|Schroder European Sustainable Equity (GB00B6S00Y77)||19,018||0.88|
|Aberdeen Standard Asia Focus (AAS)||17,916||0.83|
|BlackRock Continental European Income (GB00B3Y7MQ71)||17,541||0.81|
|PRS REIT (PRSR)||16,508||0.76|
|British Land (BLND)||15,288||0.71|
|Melrose Industries (MRO)||14,009||0.65|
|Aberdeen New India Investment Trust (ANII)||13,447||0.62|
|Smith & Nephew (SN.)||13,332||0.62|
|Secure Income REIT (SIR)||10,147||0.47|
|Riverstone Energy (RSE)||3,795||0.18|
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’s quite reasonable to want to leave your investment manager to take control of your own investments because investing is easier than it seems. A single asset – a global equities tracker fund – can provide most of what you need. This is, in effect, a fund of all the world’s developed market equity funds, which can provide a well-diversified portfolio with low fees that does not require much effort on your part.
Of course, such a fund is risky. As a rough guide, it has around a one-in-six chance of losing 10 per cent or more over a 12-month period, and around a one-in-40 chance of losing more than 25 per cent. Even if you are happy with these numbers, and that’s ultimately a matter of personal taste, you should hold some cash to avoid having to sell investments to pay for unexpected outgoings such as property repairs.
You could also hold other funds alongside this one. A European equities fund would reduce your exposure to the US. This might be useful, not only because leading US shares are highly valued but also because the 'superstar' stocks that have driven the US market up are disproportionately vulnerable to a rise in bond yields.
Another potential addition could be a private equity investment trust, and perhaps more than one to diversify fund manager risk. It’s possible that a good amount of future growth will come from companies that are not yet listed on public markets, rather than currently-listed ones. Private equity funds give exposure to unquoted companies.
I also like a defensive bias, but not to reduce equity risk. Defensive stocks have outperformed others over the long term and a number of investment trusts hold larger UK defensives.
I’m not fussed about whether you add emerging markets exposure. These tend to be cyclical, and do well in good times and badly in recessions. With weak growth in China’s money stock now predicting slow output growth in this country, it doesn’t seem like a great time to take on such cyclical risk. I also wouldn’t rush into mining stocks for the same reason.
So it is possible to invest with less active involvement via even fewer than nine or 10 funds.
You are right to aim for capital growth rather than dividends. A high dividend is often compensation for some defect such as slow growth or extra risk. What matters is total return, not income.
But you are over optimistic in wanting average annual returns of 10 per cent. This would be too much to expect over the longer term even if equities were cheap right now – which they are not. I would instead budget for equities delivering an average long-run total return after inflation of 4 to 5 per cent. But even over long periods there is significant uncertainty around this.
This suggests that it is reasonable to draw 2 to 3 per cent from your portfolio each year. Doing this should be consistent with preserving the real value of your capital over the long run. Whether you want to be so conservative is, however, another matter. There’s nothing wrong with running down your wealth, not least because giving your descendants gifts during their lifetimes can be more tax-efficient than leaving a bequest.
Ben Yearsley, investment director at Shore Financial Planning, says:
Get specialist advice on the tax implications of your overseas assets.
You could get your annual income via a mix of capital withdrawls and dividends to make it as tax efficient as possible. You could use your Personal Allowance of 12,570 and dividend allowance of £2,000 to get £14,570 tax free from your general investment account. You could then sell investments out of your general investment account offsetting profits against your annual £12,300 capital gains tax (CGT) allowance. And you could draw further money from your Isa tax free.You don't need to pay much, if any tax on your annual income. But consider holding higher yielding investments in your Isa and lower yielding ones in other accounts.
Your target of a 10 per cent annual return from your investments is high. To achieve this, you would need to invest in higher risk funds and shares, and tolerate much higher levels of volatility. But if you buy direct share holdings, as well as active and passive funds, you will need to monitor your portfolio a lot more to keep up with newsflow on specific shares.
You have an investment pot of about £1.7m as you don’t want to touch your Sipp. To make your portfolio as tax efficient as possible, fund your Isa every year by selling down some of the investments in the general investment account.
You want about £40,000 to £50,000 a year which from assets worth about £1.7m equates to about 2.5 per cent to 3 per cent a year. This is easily achievable and should still allow your investments to grow.
Fees are important but don’t get too hung up on them and buy an investment just because it is cheap or ignore one because it’s expensive. That said, if on the Hargreaves Lansdown investment platform you just hold investment trusts and ETFs, the annual platform fees are capped at £45 for Isas and £200 for Sipps. And there is no charge for holding listed investments in a general investment account on this platform. This is extremely cost effective if you don't trade very often. So don't necessarily limit your allocation to investment trusts to 10 per cent of your portfolio. You can easily construct a portfolio with just investment trusts and ETFs.
As you can buy and sell investments within an Isa tax free, consider root and branch reform of it.Get rid of the direct share holdings and open-ended funds, and hold about 10 to 15 quality investment trusts and ETFs in this account. But, for example, don't hold both Scottish Mortgage Investment Trust (SMT) and Monks Investment Trust (MNKS), as they are run by the same management company - Baillie Gifford. Although they have some different investments to each other their performance is likely to be highly correlated.
Growth is likely to come from China and emerging markets in the current decade so consider abrdn Asian Income Fund (AAIF) and JPMorgan Global Emerging Markets Income Trust (JEMI) for both growth and income.
You could continue to hold Pantheon International (PIN), Secure Income REIT (SIR), Smithson Investment Trust (SSON), Finsbury Growth & Income Trust (FGT) and NB Private Equity Partners (NBPE). And consider adding Pershing Square (PSH) for US exposure, Temple Bar Investment Trust (TMPL) for UK equity income, Blackrock World Mining Trust (BRWM), European Opportunities Trust (EOT), River and Mercantile UK Micro Cap Investment Company (RMMC) and JPMorgan Russian Securities (JRS) to either your Isa or general investment account.
When choosing ETFs, you need to pick the indices you want to track and invest in funds which follow them.
I would hold around 15 investment trusts and ETFs in your general investment account, but rebalancing this will take longer as there are tax implications. Overall, you have an unrealised gain of about £160,000, which would lead to a tax bill of around £30,000 if you did this in one go. You will need to use your annual CGT allowance to rebalance this account over a number of years.
But you could start pruning it by, for example, selling investments which are trading at a loss such as Hammerson (HMSO). But don't sell Royal Dutch Shell (RDSB) as I think that it will throw off huge dividends in the next few years.