Advice for the lump-'rich' earnings-poor, please?

12tonelizzie

Advice for the lump-'rich' earnings-poor, please?

dunstonh

I've no employer to give me free contributions and my low earnings limit the lump contributions on which I could get tax relief. I'm maxed-out ISA-wise.

Well done on maxing out the ISA. That indicates £10,680 a year which is good going.

However, a pension would give you tax relief. So, it is still an option. Also, remember that as you are self employed, you are only qualifying for the basic state pension. Not the additional state pensions. Its possible your final salary scheme was contracted out as well so you may not have any additional state pension qualification. You should request a state pension forecast to be sure.

If so, can anyone recommend a guide on how to research managed funds? Buying index funds is relatively easy, but most of the 'info' on managed funds that I can find comes from those who want to sell them to me. I've just read HL's Investment Times from cover to cover and I felt I was being spoken to by one of those guys with a ball hidden under one of 3 cups.

HL are paid to market funds. Most of their money comes from the managed fund houses. So, you should be skeptical of their marketing. However, that doenst make managed funds bad.

Managed vs tracker isnt going to help you at this stage. First you decide the investment strategy. Then you find the funds to achieve that. In some areas trackers are best, in others managed are best. You also need to decide if you are going to be an active investor or a lazy investor. If you are going to be a lazy investor then you should avoid investments geared towards active investors. In which case, self balancing portfolio funds should be used. However, they cost more and that is the consequence of being a lazy investor.

You say you max out your ISA. What are you doing for the investment element of the ISA at the moment?

would it make sense to buy income funds or high-yield funds and use the yield/income to help with living expenses?

High yield option is one strategy but it is very limited as it focuses on one type of area and can leave you exposed when high yield is not the best place to be.

Personally, I prefer sector allocation (which involves using all the major investment sectors and putting x% in to each based on risk profile).

Iancfp

In terms of tax efficiency income paying funds can be held in ISAs to give you tax free income

You can however also hold equity funds outside of ISA if you have no unused allowance left - these could then be part encashed selling units to draw an "income" which is taxed as capital gains thus allowing you to take up to £10,600 pa tax free

A good spread of funds across asset classes will help reduce some of the risk

Using index funds and institutional funds to lower cost will help returns

Note I am Chartered Financial Planner and award winning Independent Financial Adviser but I can only give advice to clients who have given me their financial details. Any comments given in open forum are my own thoughts and are designed merely to assist and do not constitute advice

Loughton_Monkey

It's really time to get out a spreadsheet [or pencil and paper even] and try to estimate your total cash flow for the rest of your life (not as crazy as it sounds).

There are quite a lot of people, I suspect, who's finances are 'lumpy'. But start off by ignoring how your money is invested. Take a view of inflation, and take the view that over the long term, you can beat that by a % or two. Probably 1%.

So model your future income stream. Self Employed earnings - State Pension when it comes - old FS pension when you take it - interest on free capital while you have it.....

Model your spending next. Take into account any significant changes you foresee - like mortgage being repaid. And look at the tax of course.

This type of calculation is aimed to give you a 'ballpark' view as to whether or not you are within a mile of being able to achieve a comfortable retirement. If you are a long way away, then it is most unlikely that any change to investment/savings strategy is going to help you. If you are 'there' or 'thereabouts' then you can celebrate. If not, then you might need to re-tune your lifestyle and aspirations for the future. Best to understand these now rather than when you have lost any further chance of working.

But providing the model 'works' then you are well-placed now to start talking to an IFA - or even DIY if you feel up to it. You need to examine the cash flow. The likely detailed growth rates of different types of investment (saving). Tune the % of what you save (as opposed to invest) commensurate with how 'close' your model is and whether you are 'rich' enough to keep it safe and comfortable, or whether you need to sail a little bit closer to the wind.

After that, you should zoom in on specific places and wrappers in which to save/invest. Pick out best savings rates and longer term savings bonds for the cash. Consider pensions (for the tax relief) for equity investment. They are more tax-efficient than ISA's - but are designed to provide income rather than free capital - probably just what you want, at least for a good proportion of your resources.

I have a relative for whom I have done the initial modelling - proving that this person has in fact 'over-saved' throughout life! Yes, it happens! Can afford to spend about 50% more for the rest of their life! It's well worth going through this exercise rigorously before getting in too deep about what investments to make.

dunstonh

I have HSBC trackers in the ISA and L&G gilt funds outside the ISA since HL charge you more than the tax gain on those funds inside their ISA.

Yet the trackers in the ISA are not getting full ISA benefit but the fixed interest sector funds in the ISA would (they can claim the tax back in the ISA unlike equity funds). So, the extra tax could be more than the extra charge (or perhaps consider a managed fund to avoid the extra charge).

Sorry for the stupid question, but what does it mean for a high yield fund to be the wrong place? Is it that the yields plummet, or that the yield continues to be high but the unit price plummets worse than cash eaten by inflation? Or both?

High yield portfolios rely on high yielding equities (and fixed interest securities). Some of the biggest dividend payers were banks and oil. So, typically, a HYP was heavy in those. So, diversification is not that good and look what happened to the banks. A few were lost and all dropped share price significantly. Then BP had its issues and suspended the dividend. A lot the high dividend payers do not have strong share price growth.

It has its merits as a strategy but I think that it can be taken too extreme and the lack of diversification that is likely to occur means it will miss out on many investment areas.

Would that include sectors not already represented in my spread of trackers? Either way, I have the problem that it seems unwise to put the bulk of my cash into S&S all at once, although apparently there's some evidence that over time lump-sum investment outperforms dollar-cost.

Only time will tell whether phasing the investment or going in on one day is best. Statistically phasing the investment is less likely to be the best option as growth periods outnumber the negative periods. However, you cannot tell until you are fully invested and can look back.

The sectors I use are: UK Fixed interest, Global fixed interest, property, UK equity, Europe, N America, Far East, Japan, N America, Emerging Markets and specialist. The amount put into each sector is based on risk profile.

cheerfulcat

Hi there, 12tonelizzie,

I found Incademy a useful resource for the basics of investing. The Motley Fool boards, in particular Investing for Income, Investment Trusts and Unit Trusts and the High Yield Portfolio, also have a huge amount of information. I know that dunstonh has " issues " with the HYP concept and what he implies about avoiding being overweight in any one sector is quite correct but I still think it's worth a look ( FWIW I run an HYP and have been very happy with the results so far ).

The AIC site, covering Investment Trusts, may be of interest.

kidmugsy

The USS retirement age for women used to be 60. It must be worth checking whether yours is 60 or has been moved to 65.