Do I need an IFA?

Muppet81

I gave up work a couple of year ago and am now 56

Hubby is 57 and is about to take voluntary redundancy. We feel we would like to live life whilst we are both fit and able to and hope that he will not need to look for other work. He may of course get bored and opt to at some stage but as we live full lives, I suspect not.

He will draw state pension 2021 unless goal posts are altered

I will draw mine in 2023 unless goal posts are altered.

He will get a redundancy payout of £32,000 on which we will pay tax on £2,000 I believe

He has a private pension on which we are going to fully enhance his lump sum element, giving us £143,000

He will then receive an annual pension which will give us £1500pm after tax. This will be index linked.

We are going to build an extension (making our house suitable for old age - preferred this option to moving) , pay off the remaining £20,000 of our mortgage and invest £2000 into Premium Bonds. I know they are a rubbish idea but there is just that TINY chance of a win.

We will be left with around £100,000 as a capital pot.

We anticipate our living expenses to be around £2630 pm for this year and have budgeted in inflation at 4.5% in coming years.
This includes all the categories I already budget for, all house expenses, car and car loans/holidays/insurance/clothes/food/social life/decorating/vets fees/dentist/hair/life insurance/general spending etc.

Is this inflation figure realistic?

We have looked round the house and drawn up a list of items which will need renewing and anticipated the renewal year and a rough costing. This has been built into our budget over the next 10 years. After that, I think we will just be winging it rather depending on how we are coping. This might be a bit "head in the sand"

We anticipate drawing around £1000 a month from the capital pot to make up our shortfall. For this reason we need to invest out capital pot in a way which allows us access to draw down as the next 10 years go by.

We do currently live well and I hope/aim to make some reductions in our living costs but for the time being am leaving living costs as they are now.

Have spoken to an IFA but if we employ him to invest our money, we are looking at fees of £6300 over the next ten years.

In 2017 I will recieve my private pension (no option to draw early).

I will receive a lump sum and annual pension and we will then have to just draw a small amount a month from our capital pot.

Once both our state pensions kick in, we will not need to draw from what is left of the capital pot (probably quite low by them) but we will have our 2 private pensions, a state pension each (hopefully) and be able to live fairly easily.

With around £100,000 to invest initially and then in 2017 a further amount, probably about £50,000, we realise that we know nothing about investments.

We are both reasonably intelligent people and I have always managed our finances making something of an art form of it. Know where every penny goes. Martin Lewis is a hero of mine!

I feel we would like to try to deal with our investments ourselves rather than pay over £6000 in fees just over the first 10 years.

Is this stupid on our part, considering our lack of financial/investment know how? We are happyt to spend a lot of time investigating and learning, just need to know where to start.

If you had £100,000 to invest, needed it to be accesible at various stages over the next 10 years, could not afford to take any unnecessary risks, what might you suggest we look into further to give some sort of return?

I am thinking perhaps an ISA each and then £50,000 in some low risk form of saving.

Any tips, advice, pointers would be much appreciated.

Perhaps you think we should accept that we will need to pay an IFA to manage our money in order to invest as as safely as possible and to get a reasonable return. If so, would appreciate those views too.

gadgetmind

Muppet81 wrote: »

We will be left with around £100,000 as a capital pot.

Based on what else you have said, take care to maximise and preserve that.

Is this inflation figure realistic?

It looks pessimistic based on current RPI of 3.6%, but using a higher figure is no bad thing.

We anticipate drawing around £1000 a month from the capital pot to make up our shortfall. For this reason we need to invest out capital pot in a way which allows us access to draw down as the next 10 years go by.

You're looking at a 12% pa drawdown, which is *massively* beyond what's sustainable, but that additional £50k in five years mean that it should work.

I am thinking perhaps an ISA each and then £50,000 in some low risk form of saving.

Yup, given the 10 year horizon with a 5 year break, I really can't see any need to use any investments beyond fixed interest savings, and I therefore really can't see any need to blow 6% of your pot on an IFA.

Have you modeled the next 10-12 years in a spreadsheet as a cash flow forecast? If not, I'm happy to give some advice (or even lash up a crude first pass!) but there are also plenty of cash flow tutorials around.

If you try and do this and really struggle, then you might need some help, but TBH I've never experienced an IFA getting into this level of detail anyway.

Muppet81

Thank you for such a rapid and helpful response.

Everything you say makes sense and reassures me that we could perhaps manage our modest capital amount ourselves.

I have created a sreadsheet, forecasting not just 10 years but until we are 95! Hubby considers this totally anal :rotfl: and unnecessary but I am a planner.

On this I have shown the effect of inflation at 4.5 for the next 2 years but dropped it to 3.5 after that.
I have allowed for index linking on the priate pensions, as has been shown on our annual pension forecast.
I have not included any capital growth as I was unsure what this was likely to be and thought this might allow us a "fudge factor" on our figures.
I have built into this each year, the amount anticipated for renewals such as carpets/appliances etc.

Does this sound realistic?

Thank you for your offer of help but I don't want to put you to any trouble if what I have produced is sufficient.

gadgetmind

Muppet81 wrote: »

I have created a sreadsheet, forecasting not just 10 years but until we are 95! Hubby considers this totally anal :rotfl: and unnecessary but I am a planner.

That's excellent. No really, it is. Why guess if you can model?

I have not included any capital growth as I was unsure what this was likely to be and thought this might allow us a "fudge factor" on our figures.

As it looks like you don't need the "risk premium" from anything other than cash investments, nor the time to see the benefit, you need to build in the return from "layered" cash savings. Keep only what you need (with contingency) in instant access, put next year's money into a one year account, etc.

You also need to ensure you don't pay tax on interest so use ISAs *if* it makes sense, but you can probably get better returns by holding outside of ISAs as interest should be less than your personal allowance.

Thank you for your offer of help but I don't want to put you to any trouble if what I have produced is sufficient.

It sounds like it's more than sufficient!

I would be *very* interested to know how an IFA might do things differently. There is no time nor need for investing rather than saving, and even corporate bonds and/or high income equities would seem to be a stretch given your index linked pensions and cash buffer.

Linton

I believe your spreadsheet is an absolute essential. Only in this was can you try out various inflation rates, expenditure patterns etc and work out what rate of interest (after tax) you need to achieve your objective. Then given the rate of interest you need you can determine if it is practicable and if so, what sort of investments are required.

I agree with gadgetmind that 4.5% inflation is pessimistic, but of course if your plan works with it, you get an extra level of confidence. I would suggest that you monitor your own expenditure so that you get some sort of feeling for how your inflation relates to the published one. In my case I have found that the published figure is far too pessimistic, my actual expenditure on the basics of living has actually barely changed in 10 years. So for future plans I am happy to assume 3.0 CPI.

Muppet81

Thank you to both Gadgetmind and Linton.

You have made me feel happier about the future and how we need to move forward. Also I feel more able to tell OH off when he rolld his eyes when I mention my spreadsheet.

Delighted to think that my allowed inflation rate is likely to be on the pessimistic side but I will leave it high for a while to stop myself feeling too confidant. Prefer to lower it at the end of each year rather than project what it will be.

Now just need to research savings accounts etc.

Are there any good monthly publications for this or is it easy to compare them on line?

It is all very exciting and I am looking forward to the challenge.

Muppet81

Just one further thought.

What should we do as to perhaps putting some money in my name as until I start to draw my pension, I will not be paying any tax.

Would it be of benefit to put some into an account in my name?

Any way of reducing tax paid would be useful.

Muppet81

Presume as ISAs are tax free, hese could be in both names?

Linton

Muppet81 wrote: »

Just one further thought.

What should we do as to perhaps putting some money in my name as until I start to draw my pension, I will not be paying any tax.

Would it be of benefit to put some into an account in my name?

Any way of reducing tax paid would be useful.

Certainly its worth using your tax free status. For example, if you arent going to touch half of your £100K for say 5 years, you could put that half in a 5 year fixed term deposit in your name earning 4.5%. That would mean nearly £2.5K of tax saved.

jamesd

Muppet81 wrote: »

He has a private pension on which we are going to fully enhance his lump sum element, giving us £143,000 ... pay off the remaining £20,000 of our mortgage

Is this a final salary or other defined benefit pension? If yes, what is the commutation rate - how much lump sum you get for each Pound of given up income. Is it inflation-linked or increasing in any other way?

Is your mortgage at an interest rate of say 8-9%? If it's lower than that it's likely to make you worse off to take that £20,000 worth of lump sum because you''ll probably be losing income at an effective rate at least that high, perhaps as high as 12%.

Muppet81 wrote: »

With around £100,000 to invest initially and then in 2017 a further amount, probably about £50,000, we realise that we know nothing about investments.

You might find to helpful to read about:

Invesco Perpetual Monthly Income Plus
Newton Higher Income
Artemis Income
Invesco perpetual Higher Income

All of those have good reputations for what they do. The first one should get first priority for going into an ISA because it pays out interest and can pay out more inside an ISA.

The capital value of those will vary over time. Look at the pictures to see how much each has varied and expect ups and downs. there are also bond funds that have lower variation and you might look at one or two strategic bond funds.

For the income, in general you'd set up a savings account with perhaps three years of spending money in it, after deducting what you're getting from the pension. Then set up the investments to pay income into this account and set up a standing order to pay from this savings account to your current account each month for your regular income. Since you'll probably also need to draw on capital you can expect to have to sell some investments to top it up each year beyond what the natural income does. This savings account buffer means that you don't need to pay frequent attention to the investment performance, just checking a couple of times a year perhaps.

Neverland

I don't think its even worth you taking any investment risk with the lump sum lets face it - that is your safety net

Forget the IFA and spread the money between the two of you in a combination of term deposits, notice accounts and some in an instant access account for emergencies

ISAs aren't really worth it because you will both be below your personal allowances on the income side

The one savings product that is worth considering is each taking out 3/5 index linked NS&I saving certificates which gives you guaranteed inflation protection over the term

If you each got a 3 and 5 certificate that would protect £60k from inflation

Of course at the moment NS&I isn't issuing any index linked certificates...

P.S. I think you would be best off trying to do some part time work, that would make your sums much much easier