Mother's Pension Pot

Brock_and_Roll

Dear Board,

My mother (67) is about to sell her business and retire. She has no pension plan but I will be investing her circa £400k+ pot of cash for her retirement income.

Our requirements are:

1) Do not want to drawn down any of the capital at this stage
2) Low risk
3) Not too many bank accounts due to pain of setting them up KYC etc
4) Ideally bank savings accounts that pay interest into her current account

My initial thoughts are as follows:

2.5% Cash (yield 0%)
10% Bank Savings Account 1 (yield 3%)
10% Bank Savings Account 2 (yield 3%)
10% Bank Savings Account 3 (yield 3%)
50% Low Risk FT100 Equities (yield 3.5%)
15% Corporate Bonds (yield 4%)
2.5% Higher Risk Investment (yield 6%)


Would be very grateful for your views on this split or accounts/products that might be of interest?

I am a pretty experienced investor and I am also a banker [boo!!] - but this is still a bit daunting as I will have the task of setting all this up, opening brokers accounts and administering it as my mother is not very good at this kind of thing. So ideally I want a good online broker account and online bank accounts.

With regards to the higher risk investment, I am looking at the Aegus Bowl (Hampshire Cricket Club) Diamond Debenture - it is fairly risky but it does have the added bonus of some "free" tickets to international matches!

I appreciate there are IHT and Income Tax issue about having a big pot of cash like this (and an unencumbered property), however, my first priority is to get her retired before she works herself to death as she is still doing 60+ hours a week. Once she is settled, I might look at tax issues etc.

Thanks everyone.

Linton

Three thoughts:

I wouldnt class FT100 equities as low risk. Suggest you look for something with a global coverage.

How much income does she need? If she needs the income you should be able to get much better than say 3.5% overall. Dividend paying shares and/or income funds would do that.

I think you need to consider how you can inflation proof the lump sum. Rather more higher risk investments without too much concern about their yield could be helpful.

Lokolo

As above, 50% in FTSE equities is not low risk. I would be looking at more fixed interest investments.

dunstonh

You appear to be quite happy to have a third of it loss making in real terms (or virtual maintaining real terms). That may need to be reviewed as it may be too cash heavy. FTSE100 equties are not low risk.

How about making some pension contributions? Tax efficient and will give the best income rate and takes money out of the estate. She may be able to do two years worth of contributions from the company depending on timing of the sale.

Brock_and_Roll

dunstonh wrote: »

You appear to be quite happy to have a third of it loss making in real terms (or virtual maintaining real terms). That may need to be reviewed as it may be too cash heavy. FTSE100 equties are not low risk.

How about making some pension contributions? Tax efficient and will give the best income rate and takes money out of the estate. She may be able to do two years worth of contributions from the company depending on timing of the sale.

Thanks thats a very interesting thought. The sale has not gone through yet - do you know roughly what the rules are about how much she could put in? - she only draws a low salary of £1500pm.

Good points also about fixed income and non-UK/FT100 investments - will certainly consider this. When I wrote FT100 I basically meant leading stocks, not necessarily UK ones. I already have a hitlist of my favorite stocks UK and otherwise where I like both the company and the management teams.

With regard to inflation proofing, I am not so concerned at the present time as for several reasons her expenditure is likely to fall over the next decade rather than rise - for example she currently travels to Australia and the USA on a regular basis - something she will not do so often 10 years from now.

dunstonh

Thanks thats a very interesting thought. The sale has not gone through yet - do you know roughly what the rules are about how much she could put in? - she only draws a low salary of £1500pm.

Is she self employed or is it a limited company?

oldtoolie

"I already have a hitlist of my favorite stocks UK and otherwise where I like both the company and the management teams."

If you are a good and experienced stock picker, go for it. But you are competing against people who do it 24/7. That why I stick to funds, trusts and ETFs.

I recently had an appointment with a Chartered Financial Planner -- not cheap but he explained some things to me that about pensions, capital gains and IHT that will more than pay his fees.

There four things to consider:
- Structuring the assets for income and tax purposes.
- Setting up the platforms to manage that structure
- Determining asset allocations
- Selecting which assets within the allocations

The CFP is helping me with the first but I'm doing the rest.

atush

I agree with DH and others that you are too heavy in cash (many forget that inflation risk is guaranteed whereas they are afraid of investment risk which isn't) and she should make some pension contribs Immediately.

jamesd

Brock_and_Roll wrote: »

1) Do not want to drawn down any of the capital at this stage
2) Low risk
3) Not too many bank accounts due to pain of setting them up KYC etc
4) Ideally bank savings accounts that pay interest into her current account

My initial thoughts are as follows:

2.5% Cash (yield 0%)
10% Bank Savings Account 1 (yield 3%)
10% Bank Savings Account 2 (yield 3%)
10% Bank Savings Account 3 (yield 3%)
50% Low Risk FT100 Equities (yield 3.5%)
15% Corporate Bonds (yield 4%)
2.5% Higher Risk Investment (yield 6%)


Would be very grateful for your views on this split or accounts/products that might be of interest?

It badly fails to be low risk for her circumstances. There is minimal possibility of taking any income after retaining enough to keep the pot size matching inflation. What you'd be doing is setting her up for the equivalent of a major stock market crash in losses every few years due to inflation.

So a pretty much complete failure to be low risk, instead guaranteeing substantial losses to inflation.

For a low risk combination you should instead be looking at combinations that include as substantial portions of the pot things like:

Invesco Perpetual High Income
Invesco Perpetual Distribution
Invesco Perpetual Monthly Income Plus

The first of those is one of the most popular funds used by retirees, with good reason given it's superb performance record. I'm just sticking with one company because those happen to be convenient examples of investment types, thought they are also good to decent fund choices that I'd be happy to use myself (and I do use two of them).

There will be ups and downs of investment value but at least there will be ups. Unlike inflation, which, barring the unlikely chance of sustained deflation, is up and causing losses only.

Take care with use of gilts and high quality corporate bonds. I's pretty clear that those are in a substantial bubble that will pop at some time around economic recovery and rising interest rates. At which point a 30-40% or higher capital loss that will not be recovered later can be expected. Consider commercial property funds instead of some of this, those are unpopular at the moment and will grow in value during a recovery instead of dropping.

Do remember the ongoing time and attention costs as well as higher risk level of holding individual company shares. Collective investments have some ongoing costs but they substantially reduce the concentration of risk and attention level that's needed. A bit of both may be appropriate.

She might also consider some use of VCTs because those get a 30% tax refund (up to the amount of income tax actually paid, so not so much in here case) then provide tax free ongoing income and no CGT on a sale provided they are held for at least five years first. They can be a useful complement to the S&S ISA allowance. But she's not going to be able to make much use of them due to her reducing income tax situation, except maybe by buying on the secondary market, which doesn't get the initial tax relief. These are fairly high risk so a relatively small portion of money invested in them might be the most that could be appropriate anyway.

Deal with the regular income requirement by having investment income paid into a savings account and a monthly standing order paid from the savings account. Put two or three years worth of anticipated income in the savings account initially and it'll smooth out variations in when investment income is paid and how it varies, so she'll get regular monthly income without frequent changes, just periodic annual or less reviews.

sabretoothtigger

pension contributions

I thought the same, surely quite rewarding as there is not long to wait to get it back

If you were holding alot of cash, its sensible to have at least some token part in gold

1% gold /gold fund
5% Asia Pacific tracker
5% emerging market bond fund

Thats your high risk element I guess. To me its not high risk as UK is not especially safe nor its cash but not many will say that. If your mum goes to Australia then holding some worth in Aussie dollars is justified I think which is the largest part of the Asia Pacific tracker.
I dont know she would want to hold the plain AUD cash in account somewhere, seems reasonable to me

A large part of FTSE is energy, I dont think it is high risk in that case. Medium and it pays an ok income

Invesco Perpetual High Income

Yep he has a particular mind to avoiding risks and capturing fair value income returns
Everything in there is FTSE so you might be smarter to take that managed fund instead, unlike my view he isnt holding energy but its 14% utilities
http://www.trustnet.com/Factsheets/PortfolioHistory.aspx?fundCode=PPHI&univ=U

Brock_and_Roll

Thanks guys, much appreciated.

One final question. My mother is elf-employed but has been making drawings of £1500pm. Ho much do you think she would be allowed to make in a one off pension contribution before the business is sold?