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Here is our question of the week

We have a portfolio of ISAs/ PEPs worth around £250k, currently invested via Cofunds, managed by Chelsea and Bestinvest. I'm told this is quite an expensive option regarding platform charges. Are there better options? I tend to ask for advice on the make-up of the portfolio about once a year and change perhaps 4 or 5 funds.

Jack,

08 May 2018

Helena Wardle, Certified Financial Planner

Hello,

 

You do pay to use a platform, and this normally adds between 0.25%- 0.50% per annum to your annual charges depending on the value of your portfolio. However, if you regularly change funds, then platforms do give you access to a wide range of investments with one provider, and this would typically reduce the time of out of the market when you switch investments. It also reduces the administration for you to facilitate the fund switches.

 

If you held the investments directly with the individual investment companies/fund managers, switching would mean selling the investments and repurchasing new investments, potentially with a different company, to implement any changes. You would also need to action every switch as an ISA transfer to ensure you keep the ISA allowances that you have built up. Another consideration is that platforms often get rebates from fund managers which is effectively a reduction in annual charges for offering their funds on the platform. This has to be passed on to clients in full. You should see any rebates in the transaction history of your annual statement.

 

If you want to keep all of your investments together, you can as an alternative hold a number of investments with a discretionary fund manager without a platform, but this would also incur an annual charge. Another consideration is how involved you are in making the decisions on your investments. Do you get advice on any changes to your investment funds or do you select the changes yourself? Discretionary fund managers typically manage the money on an ongoing basis for you and clients are not usually that involved in the investment decisions that they make.

 

Your annual statement from Cofunds would provide you with a breakdown of your cost and charges each year, and this would show the yearly expense of using Cofunds, the funds and any additional management charges that you may be paying. You can then weigh up if you are getting value for the costs that you are paying. For a £250k portfolio, Boring Money identified iWeb and Interactive Investor as having two of the lowest platform and management fees. This assumes 14 transactions a year at £6,000 each.   

 

I hope this helps,

 

Helena

Pensions

How long does it take to release money from your pension at 55 years old?

,

01 May 2018

Helena Wardle, Certified Financial Planner

 

The time it takes to release money from pensions depends entirely on the pension type and the current timescales for your specific provider.

 

Just after pension freedoms began in April 2015, this took a long time. Now, however, most providers are actioning clients' requests within about 10 working days. If you are drawing taxable income in addition to tax-free cash, it would be worth checking with your pension provider if they have a specific payroll date that they pay taxable income out on as this may affect how long you have to wait for the money to be paid.

 

Your pension provider would also be able to let you know the administrative forms and process for releasing money from your pension, and any additional information that they may need from you to process the request. You may have to provide proof of your bank account or identification and it's always best to check with your pension provider so you understand what to expect. Be aware that withdrawing from your pension may affect your ability to save further into pensions if you are accessing taxable income and tax-free cash from this withdrawal.

 

Please also be mindful of the tax implications on the withdrawal that you are planning. Up to 25% of the pension fund can normally be drawn tax free, if you are only releasing tax free cash then you would not need to worry about the income tax implications. Your ability to save more into pensions in future would not be reduced. However, if you draw tax free cash and taxable income the provider may tax you on a higher rate, and you would have to reclaim any overpaid tax either through a self-assessment tax return or by completing a form on the government website https://www.gov.uk/claim-tax-refund/you-get-a-pension. A bit time consuming and bothersome!

 

I hope this helps

 

Helena

Do you have information on taking your pension pot before retirement? My husband is 62, on a final salary scheme & is trying to get clear information on it.

Jo,

17 April 2018

Helena Wardle, Certified Financial Planner

I can appreciate that it can sometimes feel like a quest to get clear information on anything pension-related! 

Most final salary pensions would allow members to retire before the final salary pension's retirement age if you are over 55. However, the amount of income he would get would typically be reduced by what is referred to as an early retirement penalty.

Final salary schemes are very individual and each scheme has their own set of rules that stipulate whether there's a penalty for taking pension benefits early. Your husband can contact his pension administrator to request an early retirement quote. This would show him what his pension options are if he received the pension now and for comparison purposes, what his estimated pension income would be at his normal retirement age. The pension quotes would generally give him the option to just take income or to take income and a tax-free lump sum.  He can also ask the scheme administrators if he would have a penalty for drawing the pension early and ask them to specify what the penalty is.

To give you an indication: for most final salary pensions, there's between 3%-5% reduction in benefits for every year before designated retirement age. So, for example, if your husband took the benefits at age 62 and the final salary pension retirement age is 65 he could have a reduction between 9% and 15% based on typical early retirement penalties. You would need to weigh this up against the loss of income if you don't draw the pension now, and how this fits in with your overall income position in retirement.

Questions to consider: Can you afford to accept the reduced income for life in exchange for drawing the pension earlier? If your husband does have a penalty to take the pension early, do you have any other savings or pensions that you could use to defer drawing on the pension until he can take it without penalty?

I always recommend that clients get a forecast from the department of work and pensions, so they understand what their estimated state pension would be. This helps build up a clearer picture of what your pension income may look like https://www.gov.uk/check-state-pension.

If you struggle to decide on the best way to take the benefits based on the information the scheme administrators provide and want a professional opinion on what option would suit you best, you may want to contact a Financial Planner to discuss this further. Some financial planners offer a free initial consultation, and they would explain the services they provide and cost so you can decide if you would prefer to employ a professional to help you. You can use websites such as www.unbiased.co.uk or www.vouchedfor.co.uk to help you find an adviser.

I hope this helps!

Helena

Investments | Pensions | Personal Finance

Hi, I've got an old D.B. pension, approximate value £12k. I would like to invest & top up each month. Who would you recommend? Also I would like to make an investment, & don't know where to start? Thanks

Eve,

04 April 2018

Helena Wardle

Hi Eve,

It's often confusing to decide ‘where to start' with pensions and investments.

Starting with your pension:

If you have left the company or are no longer an ‘active' member of the defined benefit pension mentioned, then you would not be able to invest further into it. Defined benefit pensions are generally based on the length of service that you worked for the company and the salary you earned while you worked there. Therefore, once you have left the company, you are no longer in service and cannot continue to build up new pension benefits. The benefits you have built up while working for the firm are effectively ‘deferred' and would normally increase in line with inflation until your company pension retirement date. 

If you are still working for the company and the defined benefit pension is still building up benefits for you, you may have the option to buy what is referred to as ‘added years' by contributing more as a lump sum or monthly amount if the pension scheme would allow it. The easiest way to check this is to contact the pension administrators and to ask them if you have the ability to invest further into your pension.

If you are unable to top up the pension and you are unsure of the options available to invest in a pension, you could contact a financial adviser to advise you on the options available.

Similarly, an adviser can help you decide on other investments, help explain terminology and planning that you need to consider before investing. It's often a good process to go through as it helps you consider the longer-term plans for the money and the best place to invest it to suit your plans and goals for the money. We all have areas that we understand very well, and I often get similar questions to help give clients direction.  It's easy for us to explain something that we work with every day and similarly, good financial planners should be able to bring the planning for money matters to life so you can understand how the different puzzle pieces fit together. Because you want to save into pensions and investments, it may be helpful for you talk this through to understand which balance between the two would suit you bets. Some financial advisers offer a free initial consultation, and they would explain the services they provide and cost so you can decide if you would prefer to employ a professional to help you.

You can use websites such as www.unbiased.co.uk or www.vouchedfor.co.uk to help you find an adviser. Alternatively, there are online investment providers that you can use to select a pension and investment yourself. Boring Money's Best Buys are chosen for their user review ratings, good value and good customer service. Have a look at Charles Stanley Direct, Hargreaves Lansdown, Nutmeg and AJBell Youinvest

I hope this helps,

Helena

Helena Wardle is a Chartered Financial Planner at Sterling & Law. 

General

We have four grandchildren (2 English living in UK, and 2 Irish living in Eire). We have decided to start savings plans for their futures. Their ages are 18yrs, 11yrs, 8yrs and 4yrs respectively. My age is 75yrs, and my wife is a little older. What should we do, please?

John M Mutch, BKM

01 January 2018

Martin Bamford

It’s always good to hear about grandparents wanting to give a helping hand to the future generations. In general terms, there’s a lot of wealth inequality between the post-war ‘baby boomer’ generation and youngsters of today, with the future looking rather bleak (financially) for kids growing up. A combination of high living costs, large student debts and unaffordable property prices makes a wealth transfer the only way most children growing up today will be able to afford a secure financial future.

 

The range of ages of your grandchildren pose some challenges from a financial planning perspective, in terms of how you treat them fairly, allocate money to different levels of investment risk, and consider tax planning for both them and you.

 

Starting with some inheritance tax considerations for you. During your lifetime, you each have a £3,000 annual ‘gift allowance’. You can any unused gift allowance over from one tax year to the next, so if you’ve not made gifts before you’ve got the potential to gift up to £6,000 in the first year. There are some other tax-free allowances for inheritance tax purposes, including gifts worth less than £250 (although this can’t include gifts to anyone who has benefited from your annual gift allowance) and wedding gifts of up to £2,500 to a grandchild.


Perhaps the most useful inheritance tax allowance is gifts made out of any surplus income you have. These need to be regular gifts and you have to demonstrate that making the gifts doesn’t reduce your standard of living. Regularly paying into a savings or investment account for your grandchildren is likely to benefit from this surplus income allowance and the best way to demonstrate affordability is working with a Financial Planner to construct a lifetime Financial Plan.

 

Once you have decided how much to gift, for the three younger grandchildren you could contribute to their Junior ISAs. Their parents would need to open these accounts on their behalf, but once open you can contribute towards the maximum savings limit of £4,128 this tax year. This money is then invested tax-free until the child reaches their 18th birthday, at which point they have full access to the cash, but could (with some parental guidance) choose to roll the money over into an ordinary ISA.

 

With interest rates so low at the moment, putting this money into cash is likely to be unappealing. Instead, you could invest the monthly contributions into an investment fund spread across a range of investment assets, to help reduce the risk. The act of investing money also helps to reduce risk over time, a process known as pound cost averaging.

 

For the 18 year old grandchild, your options are a little more limited. You could speak to a solicitor and create an 18-25 Trust, which restricts access to the cash until they reach their 25th birthday. From a tax perspective, this means any income within the trust is subject to income tax at the trust rate of 45% on gross non dividend income exceeding £1,000, or at 37.5% on dividend income. Depending on the size of the gifts, it’s unlikely that any income tax will be charged. Capital gains tax should also be within the trust’s annual allowance, which is £5,650 in the current tax year, unless you are making substantial gifts.

 

Alternatively, you might agree to pay towards their living costs whilst at University or during their first career, for a period of time. If they are still in full-time education, this category of gift is free from inheritance tax too.

 

Best wishes,
Martin 

Investments

Given the recent poor performance in Woodford Equity Income, do you think I should sell it or wait for the fund to recover?

Jenna , Con

17 December 2017

Mark Dampier

There can be no definitive answer, if only investment were that easy. However all active managers go through poor periods which can last not just months but years. Generally the good news is the good ones come out strongly after this period and in previous times this has happened with Woodford. Indeed it has been right to buy them during those poor periods.

Patience is required and this can be difficult when the media are in full flight. The fewer decisions you can make the better, investors tend to trade too much, both a buy and sell decision needs to be right and usually one goes wrong.

One other point I would make is that within a portfolio you want your fund managers doing different things, that way you get a real diversification, that means that funds will perform in different market environments.

My conclusion is an easy one, I would hold onto the Woodford holdings, as I am doing within my own portfolio.

General

I am getting long in the tooth at 79, a little forgetful and I am going through a painful divorce. This has shattered my confidence and I need help. The end result is that, folowing pension sharing (as yet not finalised), I am likely to have a much reduced pension (around £16k net). We had to sell and divide the house and I am sitting on c.£210,000. Whilst I was getting pensions pre-divorce of over £27,500 net, the reduction to c.£16,000 is going to be very hard to adjust to, though I appreciate there are folks getting less. At present I am living with a new partner who has a house and is happy to see me as a permanent feature. A friend with a successful finance track record has strongly suggested that I put the £210,000 into ETF fund ISF-L (which basically tracks the FTSE 100), use my ISA allowance and draw down on it over an estimated lifetime of 15-20 years., using the calculator at http://www.vertex42.com/Calculators/retirement-withdrawal-calculator.html. My alternative idea was to buy a holiday let cottage in the West Country, but my friend points out that this can be quite hard work, expensive in maintenance, management and booking fees and just as volatile for capital value as the stock market. Do you have an opinion, please? I am finding it very difficult to make a decision. The stock market seems dangerously high at the end of 2017.

Eric, Kent

05 November 2017

Holly Mackay

I’m so sorry to hear you’re having such a horrible time and I really hope things work out well with your new partner and you get over the trauma of the divorce. Let me try and help as best as I can in this forum.

 

I do suggest that you try and find a local financial adviser to talk to. You need to make the money you have work well for you – you should be able to find someone for a ‘sense check’ discussion for a few hours which will probably cost you about £200 an hour but be a good investment. You can also try the Government’s free help service The Pensions Advisory Service. They will be very good on the pensions facts but they can’t give you individual advice on where to invest. Worth a call though to ask all those technical pensions questions to?

 

With the £210,000 you need to work out what your timeframes are and what you want the money to do. The benefits of an ISA is that you can stick £20,000 into it this tax year and the gains are largely tax free. And the money is accessible.

 

The fund your friend suggested is what we call a ‘tracker’ fund from the world’s largest fund manager. It mirrors the FTSE 100 as you say. This can be a very good foundation but it doesn’t spread your risk around enough. You’re totally exposed to the rather uncertain UK future! So you should have money invested elsewhere too or all your eggs are in one basket. 

 

If I were you I would have a look at Vanguard. They make funds like the one your friend suggested. But they will also do all the blending of various regions for you. So you don’t have to worry. Search for their LifeStrategy range and have a look at their website. It’s cheap and they will manage the money on your behalf, removing lots of decisions which you don’t sound like you want to make right now. You just have to pick how much ‘spice’ you want. No spice means very little upside. Lots of investment risk will boost returns but it will be a bumpy old ride. The LifeStrategy 60% is the most popular fund – have a read about that.

 

Now this doesn’t address your need for income. You can also invest in some funds called Equity Income funds which aim to pay you out a regular income, which could boost your pension. Look at the UK Income funds on Hargreaves Lansdown’s Wealth 150 list. As one example, the Artemis Income fund is always popular and has paid out about 3.7% of income a year. So you could split your money into 2 and have a longer-term pot with Vanguard which you just leave alone and a shorter-term income pot with Hargreaves?

 

Holiday lets are (in my experience) time-consuming and not that lucrative unless you are prepared to put a lot of time into it. And taps leak. And things fall down. And it’s tricky! You sound like you need an easier time in 2018 so I’d be careful with this option.

 

Finally yes I think the stock market is very high. But we just don’t know what the future holds. It will come off its highs at some point I have no doubt. But I don’t know when. With the 15-20 years timeframes you mention, you can ride out the ups and downs. It maybe leave yourself enough in cash to mean you wont need to sell down any investments for a few years if things do stumble. Leave a cash buffer which will tide you over when the markets are having an ugly year. The best easy access account is paying about 1.3% today. NS and I have an income bond paying 1% and they’re as safe as it gets.

 

Good luck. I hope this helps. I can’t give you specific personalised advice as I don’t know enough about your circumstances. I do recommend you look for an adviser even if it’s for a sense-check meeting. Unbiased or VouchedFor will point you to advisers near you. I hope 2018 brings you better luck.

Investments

My mother is 84 and has around £35,000 in cash, realised when she moved to a smaller house. She would like to invest it and draw income that would be slightly higher than the natural yield - say around £2,000. What is the best vehicle for that please?

Ed , SXE

18 September 2017

Danny Cox

£2,000 a year is just under 6% and higher than the income which could be taken from a stock market investment (typically around 3.5%) and higher than most other types of investment such as corporate bond funds.  This means that your mother will be spending some of her capital each year. This may not be a problem, however if invested, spending capital could increase the rate at which the money might run out if the stock markets are unkind to you – if you spend capital when markets are rising there is no problem, however if you spend capital when markets fall, your investments have toi grow much faster to get back to where they were and you can easily be in a position where they fail to recover.

 

You also need to take into account inflation and the need to potentially draw more money in the future: £2,000 this year will have the spending power of around £1,600 in 10 years time.

 

Therefore we should assume that each year the income needed is going to rise by 2%, from £2,000 this year to £2,400 in 10 years time.

 

So let’s look at 2 potential options:


- Hold in cash: interest rates are poor but limping upward. If we assume an optimistic average interest rate of 2%, the money runs out after 17 years. This may be perfectly satisfactory and the advantage of this strategy is there is no stock market risk and being in cash there is lots of flexibility to make further withdrawals if needed

-Invest in the stock market: If we assume a conservative average 4% return each year after charges, after 20 years there is still £6,000 left.

 

My preference would be a combination of these. Hold some money in cash for flexibility and to pay the first couple of years income, and invest the balance in either a low cost FTSE All Share Tracker, or a combination of equity income funds. Use a combination of cash ISA and stocks and shares ISA to eliminate any tax issues, sheltering the whole £35,000 over 2 tax years (the ISA allowance is £20,000 a year).

 

- £10,000 in cash, £25,000 in the stockmarket which would mean the money would last around 19 years, assuming the markets are kind to you.

 

Of course this is just looking at this money in isolation and there could be other, better options.

Investments

I have just sold my house and have a significant sum of money I want to invest. I may want to draw some income but also want to achieve capital growth. Are there funds that aim to achieve both or should I just invest for growth and draw money as I need to for income ?

Jon, SRY

13 September 2017

Peter Matthew

Investing for both income and capital growth is possible (advisers call it investing for total return) but usually requires some compromise. If you go all-out for income, you are likely to limit the growth of the portfolio, whereas going all-out for growth will likely lead to a lower income being generated.

But that's OK! The best place to start is to define what you need out of this investment. If income is the priority, how much do you need, how long for, and when does it need to start? Begin with your goals and work from there to build a portfolio that aims to achieve those goals.

It's important to consider both the level of income and the capital value of the money. For example, if you need a higher level of income than the portfolio is likely to generate, you may need to dip into the capital. If you do this, how long will the capital last? What happens if you need to draw down from the capital when markets are dropping in value?

I suggest that you keep up to a couple of years' income in a risk-free bank or building society account, and give the portfolio chance to begin producing the income and capital growth you need. This will place a buffer between your income needs and a market decline, and enable you not to have to touch the portfolio if it is temporarily looking a bit sick. This might all seem a bit complicated, but with a bit of research it is possible for anyone.

 

Finally, there are funds which aim to do all of this for you (except for the cash buffer part). Look for funds with names that include the word 'income', but make sure that they include a spread of different kinds of assets and that the money is spread around the world, rather than just in the UK.


If in doubt, seek advice from a good financial planner, who will be able to help with both the cashflow planning part and the portfolio construction.

Pensions | Investments

Please help me . Choosing a pension from Aviva . It asks if I want growth or income ? Which one do I choose ? I'm 46 .

Ria, Greater London

11 September 2017

Holly Mackay

We obviously invest to make money. And hope for better returns than cash. The money we make can either be paid out to us as income or represent itself as growth.

Here’s a basic analogy. Imagine your pension is like a bag of Minstrels. Every year you get given an extra Minstrel. You can choose whether to eat it there and then or whether to pop it back into the bag and stockpile more Minstrels.

 

It’s the same with your investments. When companies you invest in make a profit, they can either re-invest that cash in making themselves bigger and better, they can stockpile it in the bank or they can give a bit back to their shareholders. Any cash they pay out to shareholders is called a dividend. This is like some income for you. You can either choose to take that cash when it’s offered, or re-invest it and buy more shares with it. Foregoing the cash today for a bigger pile of shares. And that’s the difference between investment for income and investing for growth.

 

As an example, £1,000  in the UK stockmarket might pay you an income of about £20-£30 a year. Growth investors will choose to ‘re-invest’ this and increase the number of shares held. Which they hope will go up in value too.

 

If you could use some income to boost a salary or a pension, for example, you will probably want the income option. If you’re saving for something like pension which is at least a decade away, it probably makes sense to grow your stash and consider any ‘growth’ option to boost your savings.