'How can we use our investments to gift more to family?'

Jane is age 75 and her husband is 83. They both retired 23 years ago to have time for themselves and travel. They receive income from pensions of £25,500 a year, which includes Jane's former workplace defined benefit (DB) pension and state pension which pay out £7,560 and £7,300 a year, respectively. Her husband gets a DB pension and state pension £3,940 and £6,700 a year, respectively.

They also receive rental income of £15,000 a year, and dividends and interest from investments take their total income to over £70,000 a year.

They have three children, and three grandchildren between the ages of nine and 15.

Their home is worth about £550,000 and they have a rental property worth about £350,000. Both are mortgage free.

"Financial planning is central to our family," says Jane. "Our annual expenditure, including entertainment and holidays, comes to £32,650 a year. We have also been making regular gifts out of surplus income of £20,000 a year to our family and would like to increase this amount. So we would like our investments to generate dividend income of £45,000 and growth of 2 per cent a year so that we can gift more from surplus income.

"We have already bought homes for our children and a buy-to-let property, from which the rent goes towards their pensions. We bought these nine years ago so that they are now out of our estate for inheritance tax (IHT) purposes. We have also set up a discretionary trust, drawn up wills and put in place lasting powers of attorney. And we have set aside easily accessible cash in case we need care in later life and to cover any inheritance tax (IHT) liability so that our beneficiaries will not be forced to sell assets in a down market to cover this cost. We also want to reduce the value of our estate to below £2mn by gifting 10 per cent of it to charity and making lifetime gifts to our family.

"Our assets are equally divided between my husband and myself.

"We set up junior individual savings accounts (Isas) for the grandchildren when they were born and, for example, the youngest child's account now has a value of about £38,000.

"We would like our own investments to be a simple portfolio of 10 holdings so that it is easier to manage when we are older. We are comfortable with downside risk of up to 40 per cent, although think that NS&I Index-linked Savings Certificates and Premium Bonds, and cash, are good diversifiers – especially in market meltdowns.

"Our portfolio is split into three 'buckets' with different risk levels – growth, income and safe havens. I have a long-term perspective and aim to stay the course throughout all market cycles. I ignore market noise and broker recommendations, and review our portfolio once a year.

"I buy funds that I think serve our goals and are run by excellent managers. I am particularly mindful of charges so don't trade much and hold the investments on a cheap platform. But I do use both our full annual Isa allowances each year and have taken £24,000 in profits in each of the past three tax years within our trading account. This was maybe down to luck rather than design – most of the profits were made on growth holdings such as Scottish Mortgage Investment Trust (SMT), Edinburgh Worldwide Investment Trust (EWI) and JPMorgan US Smaller Companies Investment Trust (JUSC). I also sold our holding in Henderson Smaller Companies Investment Trust (HSL).

Other recent trades include reinvesting profits made on Scottish Mortgage Investment Trust and iShares Core S&P 500 UCITS ETF (CSP1) in our Isas in Murray Income Trust (MUT), HSBC MSCI World UCITS ETF (HMWO) and Abrdn Property Income (API).

"I am now thinking of getting more exposure to dividend income and private equity, and wonder if I should sell Mercantile Investment Trust (MRC), JPMorgan Japan Small Cap Growth & Income (JSGI) and Invesco US Treasury Bond 7-10 Year UCITS ETF (TRXS).

"When I took over the management of our portfolio of 39 holdings from my husband three years ago, I switched out of funds into low-cost exchange traded funds (ETFs) focused on major markets, sold the direct share holdings, and bought some alternative assets and private equity. I also favour investment trusts with low charges.

"I am not sure if the investments are diversified enough across regions and asset classes. I consider myself a novice investor who has had to learn quickly.

"We now have 22 holdings and I am not sure how best to reduce them to a manageable number."

Jane and her husband's portfolio

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

Phil Craddock, Private Client Manager at Courtiers, says:

You would like dividend income of £45,000 and 2 per cent capital growth a year from your invested capital which is worth about £1.173mn. This equates to an income yield of 3.84 per cent and is well within reach of many income funds. You would then use this income to make larger IHT-free gifts out of surplus income.

Your current dividend income comes to £27,000 – a 2.31 per cent income yield – and your overall income is £71,800 a year. As your expenditure is only £32,650 a year you should investigate further possibilities which may enable you to invest your capital more effectively and better mitigate any IHT liability.

A key consideration in IHT planning is trusts and you have already set up a discretionary trust. This is an area where a suitably qualified financial adviser would be most beneficial, and it is always prudent to take legal advice in connection with any trust and estate planning. You can, for example, hold investments within a trust where the growth in the value of the assets is outside your estate and it avoids assessment for IHT liability. Another type of trust arrangement allows you to achieve an immediate discount in the value of the invested capital for IHT purposes, where the investment is in effect exchanged for a lifetime income with income tax deferral for 20 years. 

Transferring assets to your children and grandchildren is a major priority so also consider making potentially exempt transfers which fall out of your estates for IHT purposes after seven years from the date of making the gift. But ensure that you still have sufficient resources to meet your own needs throughout your lifetimes. Cash flow planning would help to forecast your net worth over time and also be useful when considering the potential costs of care fees.

The amount of liquid cash you are holding to cover care costs is excessive and will hinder your assets' potential longer-term growth prospects. A better option would be to set aside 12 months worth of care fees in liquid cash – maybe £100,000 to £150,000 depending on your locality and the cost of care – thereby releasing more capital for investment and/or gifting.

Emma Fielding, chartered financial planner at First Wealth, says:

To simplify the portfolio, invest it in index-tracking funds. Extensive research and evidence shows that relatively few active fund managers are able to outperform passive funds over any given time period.

Focus on what you can control – keeping costs low and reducing risk by having a globally diversified portfolio. With 22 holdings, it is understandable that you are unsure how diversified it is, but this is one of the most significant ways to mitigate risk.

Roughly about a quarter of your investments are in UK equities so it has a home bias. Try to reduce this in favour of a geographic asset allocation based on global stock market capitalisation.

You could consolidate your holdings into Vanguard LifeStrategy 80% Equity Fund (GB00B4PQW151) and this could be core component of your portfolio. This is a low cost, one fund solution which invests in several index funds and [ultimately] thousands of investments across the world. This would make it easier for you to manage your portfolio and it would be sufficiently diversified to reduce risk. Vanguard LifeStrategy 80% Equity has a slightly higher allocation to UK equities than global equity indices, but holding this fund would still reduce your portfolio's UK equity exposure by about 50 per cent.

Vanguard LifeStrategy 80% Equity, as its name implies, is 80 per cent invested in equities and 20 per cent in bonds. You could then add some exposure to property and alternative assets alongside this fund.

Although you say that you would be comfortable with your portfolio's value falling by up to 40 per cent, it would be prudent to check your capacity for loss so that you understand your ability to absorb falls in value and how this could impact your standard of living. But you do have a large amount of cash which could be used in the short term if required.

Consider following a total return investment strategy which does not differentiate between capital growth and dividend income. High dividend yields can sometimes be a result of a low share price, and as there are no guarantees that high yields will remain consistent it can lead you to take more risk to maintain them. [Seeking high yields] might also mean that you overlook growing companies that offer better long-term prospects. And focusing on high yields can skew your asset allocation towards high dividend markets such as the UK.

Although you would like to increase the level of dividends you receive so that you have more surplus income to gift, you do not currently appear to gift all of your surplus income. According to your figures, you have roughly £15,000 a year which could be used to increase the gifts you currently make. Gifting the yield would help to reduce your IHT liability which is likely to gradually increase over time, although this alone will not reduce the value of your estate to under £2mn. To achieve this, you need to explore other options which will make a more significant difference to your IHT position.