Stupid question!

jamiefly

serious reasoning.

My mum has a pot of cash...

£250,000

Assuming all things being equal:

Of she was to put £50,000 in Zopa earning 5% and £200,000 in two separate accounts earning say 3% and take out £1,000 per month in proportion to the investments across the board, how many years would she be able to take out before her accounts were completely dry. She's 68 years old.

Other income

Teachers pension : ??? (40 years career, mostly half hours/part time).
State Pension :
Rental of a house : £875 gross per month

Edit: heart attack 10years ago (that stopped her smoking like a chimney since aged 13) and a stroke earlier this year. I would have thought an enhanced annuity would be more appropriate but my sisters contest this (all of enduring power of attorney) as they are thinking of themselves.

grey_gym_sock

i make it 20 years 10 months.

as well as shortfall risk, note that the £1000 per month is not index-linked, so it's likely to be worth a lot less after about 20 years.

so while this plan is comparable to flat-rate annuities - it's like them, but with shortfall risk - you should look at index-linked annuities as the risk-free option, and see if you can do better than that.

if you're looking for an initial income of about 4.8% p.a. of capital (since that's what £1000 per month is), i'd consider investing mostly in equities, with a slant to equity income, with a smaller amount in corporate bonds or other fixed interest. that could give an initial natural yield somewhere near the target income, with both income and capital likely to approximately keep up with inflation in the long term. both income and capital would also be volatile, with capital more volatile than income.

or: start with that strategy, and if it doesn't generate enough, you could later use part of the capital to buy index-linked annuities, when M is older and so gets higher annuity rates.

this is all very much food for thought and not advice, of course! ...

jamiefly

Thanks for the timeline and adding clarity re. inflation which I appreciate and accept it's taxation effect on capital.

I would love her to invest maybe half in an annuity and the other potion in dividend paying defensive stocks however I am up against two other people (sisters) who seem more interested in protecting what they feel is their inheritance.

I only (just/cooling off period) managed to extricate her and her money from a trust which would have involved huge set-up fees and on-going costs where she would have to borrow against the capital held within. Totally inappropriate and as I have refused to sign the paperwork my sisters are doing everything within the family to drive a wedge between us - I now hold the accolade of black sheep for having my mothers interests at heart.

Her teachers pension, state pension and rental income is her inflation hedge IMO

sleepless_saver

With that sum she needs proper financial advice rather than a DIY job - I suggest she contacts an independent financial adviser.

Mojisola

jamiefly wrote: »

I would have thought an enhanced annuity would be more appropriate but my sisters contest this (all of enduring power of attorney) as they are thinking of themselves.

Someone with POA has, by law, do the best for the person concerned or risk a legal challenge.

I would encourage your Mum to get independent advice.

https://www.alzheimers.org.uk/site/scripts/documents_info.php?documentID=154
Your attorneys must follow the principles set out in the Mental Capacity Act when they are making decisions or acting on your behalf. They must always act in your best interest and consider your needs and wishes as far as possible. When possible, attorneys should take all practical and appropriate steps to help the donor make the particular decision. An attorney must consider the donor's past and present wishes.
The attorneys must not take advantage of the donor's position to gain any benefit for themselves. They must keep any entrusted money and property separate from their own and from that of other people and they must keep accounts of any dealings on the donor's behalf.

jamiefly

sleepless_saver wrote: »

With that sum she needs proper financial advice rather than a DIY job - I suggest she contacts an independent financial adviser.

Once bitten, twice shy.

She inherited £900k in 1999 and paid £30k for independent financial advice which actually backfired to the tune of £300k left with £600k she gave her three children £80k each (house deposits) and in the intervening years 'invested' in art.

I'm looking for plain vanilla investments where she understands the instrument and as she only knows money that's all it should be.

dunstonh

Once bitten, twice shy.

In 1999 there would have been something like 50,000 advisers. IFAs account for 1% of complaints at the FOS despite handling the majority of advice transactions.

You are going to tarnish all with the actions of one? I hope you never get food poisoning as you will never eat again.

However, lets look at the issue...

She inherited £900k in 1999 and paid £30k for independent financial advice which actually backfired to the tune of £300k left with £600k she gave her three children £80k each (house deposits) and in the intervening years 'invested' in art.

She invested just before the markets suffered a 43% crash over a period. She lost 33% which is less than the markets fell by. The 5 years that followed were spectacular in growth whcih could see you double your money. But because she decided to not continue the advice, she missed out on that.

So, apart from the commission of £30k (which was normal for 1999 at 3% but not at all normal for 2012), there appears to have been nothing wrong with the advice but more the fact she didnt follow the advice.

I'm looking for plain vanilla investments where she understands the instrument and as she only knows money that's all it should be.

There is no point. It seems that periods of short term loss are not acceptable. You have ruled out a qualified adviser recommending investments. Now you are turning to unknown posters on an internet site. Are you going to blame the posters for bad advice when the next negative period occurs? (not if but when as there will always be negative periods)

grey_gym_sock

i'd have to agree with the suggestion to involve an IFA in this.

it might (or might not) help with the family disagreement. because you'd need to tell the IFA what the overall aims are, so that he/she can advise on how to achieve them.

jamiefly

dunstonh wrote: »

In 1999 there would have been something like 50,000 advisers. IFAs account for 1% of complaints at the FOS despite handling the majority of advice transactions.

You are going to tarnish all with the actions of one? I hope you never get food poisoning as you will never eat again.

However, lets look at the issue...



She invested just before the markets suffered a 43% crash over a period. She lost 33% which is less than the markets fell by. The 5 years that followed were spectacular in growth whcih could see you double your money. But because she decided to not continue the advice, she missed out on that.

So, apart from the commission of £30k (which was normal for 1999 at 3% but not at all normal for 2012), there appears to have been nothing wrong with the advice but more the fact she didnt follow the advice.



There is no point. It seems that periods of short term loss are not acceptable. You have ruled out a qualified adviser recommending investments. Now you are turning to unknown posters on an internet site. Are you going to blame the posters for bad advice when the next negative period occurs? (not if but when as there will always be negative periods)

It's not as simple as that and I was unable to find a calculator with regards my original question.

Fact is it had nothing to do with the stock market downturn (well in part yes) and more to do with poor financial advice I see your posts all the time and would say you are worth your salt and don't understand why you sell your wares for free on here so often (must be like a part time job hey there is no need for you to defend the 1%

jamesd

jamiefly wrote: »

Of she was to put £50,000 in Zopa earning 5% and £200,000 in two separate accounts earning say 3%

That would be an irresponsible mixture of a high risk unregulated investment with completely safe savings accounts. 5% is the maximum level that can normally be justified for a high risk investment. Far too much going to Zopa there.

jamiefly wrote: »

I'm looking for plain vanilla investments where she understands the instrument and as she only knows money that's all it should be.

If you act on that basis under a POA you should be prepared to have action taken against you for failing to properly protect the interests of the person whose money you are responsible for. This is because of the use of single high risk investment but also failing to properly invest the remainder, using savings accounts when income is required. You're guaranteeing a loss of capital when that is not necessary, a major breach of your responsibilities.

Also note that at least some of all money invested via Zopa cannot be retrieved within a known time. Those who have trouble repaying can end up taking ten or more years to repay a three year loan. So while a portion can be withdrawn quickly, some won't be withdrawable in that way.

If you dislike high fees you should also steer clear of Zopa. For money at 6% to a lender, lent out at the £4500 median loan size for 36 months in the A* market, the total interest paid is £428.35. Zopa takes £190 (36 months) or £180 (60 months) up front as a borrower (broker) fee and £71.39 of the interest, leaving Zopa taking 42% of the loan costs paid by the borrower (£261.29 of £618.25 goes to Zopa). For smaller loans it's even worse. At £1,500 for 36 months Zopa is getting 64% (£142.78 interest less 1% lender fee of £23.79 plus £190 broker fee). That's ignoring bad debt, which further worsens the split in Zopa's favour.

A standard bond fund would take no more than a couple of percent of capital value a year, split between annual management fee and trading and other costs. At 2% that'd be something like £30 a year on £1500 or £90 a year on £4500. assuming the bond is paying out 6% the underlying investments would be paying 6.7% in this case, with the bond fund taking £90.45 in charges from £900.45 total interest, a total cost of 10% of the underlying income over three years, ignoring capital value changes. That overstates the cost compared to Zopa because the mean loan balance at Zopa is around half of the amount borrowed so I should really be halving the fund costs to compare on the same basis.

An alternative and usually appropriate approach would be to use a range of income producing funds, typically equity income and distribution or bond funds. From these it's possible to take between 5 and 6% a year overall and expect to have that continue indefinitely, not draining the capital other than the usual ups and downs of the market. It only takes 5% to get £12,500 gross a year so it seems entirely reasonable to meet the income need with no loss of capital, indeed, with some prospect of at least keeping up with inflation while also taking an income.

A mixture of funds such as Invesco Perpetual High Income, Invesco Perpetual Monthly Income Plus and Invesco Perpetual Distribution and a little (a few years worth of investment income) in cash savings accounts are generally suitable for this sort of requirement.

An annuity appears unsuitable here. It's not required to meet the income target and involves easily avoidable guaranteed loss of capital.

What was the trust-based arrangement? An investment [STRIKE]trust[/STRIKE] bond, perhaps? Those can be suitable sometimes, depending on the specific circumstances. One potential advantage is being able to withdraw up to 5% a year with no tax to pay on it. Investment charges can also be lower than unwrapped investments, depends on the specific investments used and also on how good a deal the selling IFA is offering. If it was an investment [STRIKE]trust[/STRIKE] bond it may just have been an issue with the seller taking higher than desirable charges. Do be sure to consider the income tax issues. If 5% income is taken an investment [STRIKE]trust[/STRIKE] bond may save £2,500 a year in income tax, more if her income would be partly taxed at higher rate.

There is one substantial reason to avoid buying an annuity and perhaps also to avoid putting a substantial portion of the money into an investment [STRIKE]trust[/STRIKE] bond: she may need residential care and this may require higher annual spending. At the time that is needed, an immediate needs annuity payable to the care provider may make sense, though just using investments and drawing down capital may be more appropriate for the typical two to three years life expectancy in such situations.

Given your current plans, your sisters would be justified in seeking to have your POA removed on the basis of failure to properly protect the person you're responsible for.

jamesd

jamiefly wrote: »

I see your posts all the time and would say you are worth your salt

Dunstonh can't approach you but a private message will get you contact details and as an IFA dunstonh may also be in a good position to provide regulated advice on income-producing investments that could protect the capital long term against inflation as well as having an acceptable capital value variation of perhaps 10-20% a year up and down and producing the income required in this case.

Dunstonh wold have to consider the wishes of all POA holders and there seems to be a significant interest from your sisters in long term capital protection, which requires investments, not savings accounts.