Cash - what to do for the best, confused

t33

I've been reading these boards on and off and got some helpful info, but I still feel quite naive about money. I have read the Hale book on Smarter Investing which I saw recommended, and although useful it really didn't help me to make up my mind to go forward. So am a bit stuck. Maybe I shouldn't do anything? If that is so then at least that is a conclusion rather than going round in circles.

I guess my question is, what are my options given my primary concern for security. If the economy goes belly up I think we are fairly protected so that would be an extreme.

A bit of background, there is me and my partner, 58 and 59, and both taken early retirement deciding we'd rather enjoy life rather than stick with two nasty but well paying jobs. I still run a small self-employed business to keep my hand in, but it doesn't earn much. We are living on interest from cash and taking bits from savings, we have a nice lifestyle but not big spenders on consumer stuff. Our choice so far has been to enjoy ourselves but not go mad with money. Nibbling away at the amount until pensions start doesn't bother me. I don't want to be rich or make tons of money.

We have a house that is owned outright. We also have £285k in cash which is currently spread around various banks to come under the £75k (or double that joint) to come within the bank guarantee. We also have £50k of other cash.

Private pensions are not big and don't kick in till 62 for me and 63 for partner. In total the income will be £6k based on todays predictions but rising to £8k at 64. I eligible for full state pension and the other 90% at 66.

The reason we have been cautious is that we are both cautious and also though I've done reading up on stuff I don't find it easy to understand in terms of decision-making, also I don't think I am that interestesd to be honest.

We went for a preliminary meeting with an advisor and I think he was frustrated with our caution and suggested a hard think and a second meeting after that. I'm not sure about his. The only thing mentioned vaguely was buying property with a portion of the cash and renting it out. I've been lucky with the housing market till now and not sure if I want to take a risk should be market take a dive.

Sorry for the long story. I just feel really like I should be doing something, but don't know what.

Thanks you

AlanP_2

You are not alone and there is no great rush is there?

Being cautious is fine but with your current approach is possibly higher risk than you realise.

With cash your enemy is inflation as I am sure you know, and as you may have 30-40 years left to enjoy your savings (or at least one of you) then it can't be ignored - <0.5% won't last forever!

Investing (as opposed to saving) some could help to reduce the risk you are currently taking although not without a degree of uncertainty and volatility. To compare typical returns from equities are ~5% above inflation over typical 10-20 year periods even if they may fall in value by 30-40% at some stage before recovering.

That is only a "paper loss" unless you sell out when they are down in value remember. If you have enough cash / pension income to see you through the rough times (by selling out to cash when the markets are in positive territory thus topping up your "cash reserve") then so what?

Try using a tool like retireeasy.co.uk to plan your likely income and outgoings for the next 30-40 years and see what it shows in terms of "more than enough" or "not enough" per year over the timeframe you choose to look at.

fairly easy to put the raw data in and can account for Cash, Pensions, State Pensions, One Offs (like inheritances) and the like. Enter your current living costs and "one off" expenses where relevant, and guesstimate a rate for inflation and savings interest / investment returns and it maps it all out for you.

This will give you a starting point to see how things might pan out.

Cash - Is it in high interest current accounts and Regular Savers wherever possible (within FSCS limits)?

BTL Property - Up to you but in my opinion much, much higher risk than equity investments and do you want the hassle as you get older?

Playing_with_Fire_2

Hey t33,

No need to apologise for your caution - it is who you are. Some people get less cautious with experience or knowledge and that is fine too.

Have you read and understood the risk of your spending power depreciating with time? In my opinion this is as near a certainty as it gets, and will erode your wealth as the years go by. If inflation for the next 25 years is the same as the past 25 years, then your 285k in 25 years time will have the same spending power as 128k has today (as an example).

Would you be willing to encounter some volatility in the total value of your savings to reduce the erosion of your buying power? Would you feel comfortable putting around 40% of the cash into shares and keeping the rest in cash? Do you feel like you have a preference for bonds?

If I were you I would be more worried about inflation than stock risk, so on the cautious end I'd split savings a third into each of stocks, bonds and cash, and take my spending money from whichever did best that year (lazy rebalancing). Of course I'm not you.

Do you know how much you spend in a year and how much you plan to spend in future years? Have you thought about care costs?

If you are taking a back seat on investing, then think hard before buying a property and learning to be a landlord in semi-retirement - all the income tied up in the new house would be dependent on the tenant(s) keeping their job(s) and not trashing the place. This would be higher risk than just the housing market (eggs in one basket).

What are your thoughts on that?

Eco_Miser

Letting property is a business. Letting a single property is a risky business - a bad tenant can not only deny you an income, but cause tens of thousands of pounds damage.

I am also cautious by nature, but I realised long ago that cash savings were hardly keeping up with inflation - and that was proactively seeking out the best deals, so I invested some within a PEP (predecessor of S&S ISA), and have been adding most years since.
It's been a wild roller-coaster ride, but unlike a roller-coaster, the general trend has been upwards. Investing now is somewhat cheaper than then, so even better returns.

Having said that, inflation is probably not going to be too bad over the four years to your pension, but what about over the 30-40 years ahead?

With £300k a lot of it is not going to be earning very much, even if you're maximising the interest from high interest current and regular saver accounts. (Have you looked at NS&I's products - no £75k limit with them).
Why not each put your ISA allowance into S&S ISAs this financial year and next - that's just over £60k - and invest in something reasonably safe, but offering a better return than savings accounts.

t33

Firstly, thanks for the three very useful replies. A lot of things to check into and think over. I'll try to cover points raised as briefly as possible.

Yes, the cash losing value as it doesn't keep up with inflation is something that is concerning and also what keeps niggling at me to do something. Although as mentioned, I don't need to rush.

I will look at that forecaster tool mentioned retireeasy, that will be useful.

I had not considered the S&S ISAs and don't really understand these properly so will research these. I have quickly looked these up on the net so will have to look into these further.

The properly/BTL option - I had a property I'd done this with before when I lived in the city, luckily it went smoothly, but property now sold. As I now live very rurally I don't want the hassle of distance and I don't want another 'job'. So this option I don't favour despite the financial advisor.

Splitting the money into stocks/bonds/cash type of thing I suppose would be diversification but with my caution I'm not sure I'd be comfortable about this, I'd rather go to sleep peacefully each night knowing my cash is getting marginalised due to inflation erosion than worrying about a loss. I must really think this through again though.

I had thought about the type of bonds via a bank, the 1year upto 5 year bonds but it feels to me that the increase in return is very little vs the commitment to tying the money up - not well explained but I hope you see what I mean.

Our outgoings have been steady about £1100-1200 monthly for all the normal expenses. Big expenses like travelling is on top of that. All big items (cars, major household things) have been bought and paid for. Nothing big expected in the next few years though I want to keep third to a half of the cash reasonably handy as a holiday cottage is a future possibility.

The cash is in the best interest rates I can find and I switch if and when is best (though I have got lazy about this what with the poor rates everywhere). So 60k in Santander 3% and other chunks in best return for easy access or short term access. It feels like it is a sensible holding pattern.

Care cost and all that - not a pleasant thought so to be honest have not really looked that in the face yet.

Thanks again for all the suggestions.

AlanP_2

Hopefully you will enjoy the learning experience as you do your research and formulate a JOINT plan as you both need to "sign up to it" to avoid arguments in the future and so you can support each other at times of doubt - and there will be times of doubt ahead of you whatever you do.

Come back with any questions and someone will try and help you.

As neither of you are working you can invest/save £2880 Net (per tax year each) into a Personal Pension which HMRC then add £720 tax relief to.

So £5760 of your available cash could become £7200 before the end of this tax year and you can keep on repeating this each year until age of 75 (under CURRENT rules).

You can then take 25% of the pension pot tax free and the remainder as taxed income (if you need the income). So £1800 tax free and £5400 taxed at whatever your marginal rate is and as it sounds as if you don't have much "income" it would within your personal allowance I guess so that would be tax free as well.

Pension pot can invest in equities / bonds or can stay in cash.

Virgin are often mentioned on here as a relatively cheap "easy access" option provider if you do want to just flip your cash in and out fairly quickly and gain a 25% boost along the way (less their charges).

Eco_Miser

t33 wrote: »

I had not considered the S&S ISAs and don't really understand these properly so will research these. I have quickly looked these up on the net so will have to look into these further.

A good place to look is monevator.com. Much of the site is about the accumulation phase (still useful), but there are also articles about deaccumulation (living off your savings)
The ISA itself is just a wrapper protecting you from tax and the necessity to keep detailed records and do complicated calculations when reporting Capital Gains; it's the stocks, shares, funds, bonds (government and corporate, not bank accounts), ITs and ETFs you can put in the wrapper that make the money (and alter the risks).

t33 wrote: »

Splitting the money into stocks/bonds/cash type of thing I suppose would be diversification but with my caution I'm not sure I'd be comfortable about this, I'd rather go to sleep peacefully each night knowing my cash is getting marginalised due to inflation erosion than worrying about a loss. I must really think this through again though.

Real losses are certainly possible, but most losses are only on paper and the prices go up again. Dividends are more stable than prices, so if its an income stream you want, don't worry about the capital value going up and down like a yo-yo.

t33 wrote: »

I had thought about the type of bonds via a bank, the 1year upto 5 year bonds but it feels to me that the increase in return is very little vs the commitment to tying the money up - not well explained but I hope you see what I mean.

Those may be marketed as bonds, but really they're just fixed term deposit accounts.
Real bonds can be sold and bought on a market.

t33

Thanks for those further replies. I will take that on board.

I have starting looking into S&S ISAs but have a question. It seems my partner had £17k of these at some point from early 90s to 2010 and the return on them was not a lot better it turns out than if in a bank with a decent savings interest rate during that period - is this a reflection on a poor choice of where to invest? or being lazy and not keeping tabs on when it was best to cash in and reinvest elsewhere (it seems they were left where they were all through the period)?

Or does this reflect the different interest rates in the 90s which I looked up and are much better than today's. With the low interest rates on savings currently, does this mean it is a better time to be switching into S&S ISAs?

Hope that makes sense.

Thanks.

jimjames

I have to say I think you may need to recheck the numbers. I find it slightly unbelievable that the return from equities from early 1990s (1992-93?) to 2010 was poor unless you invested in a single company that did badly.

Not only did the markets jump massively during that time, you'd also have nearly 20 years of dividends too.

Can you provide any actual figures and details of what the investments were or is it more of a "gut feel" that they didn't do well? Even the FTSE All share rose from 1364 in 1992 to 3063 in 2010 so almost tripled without even looking at income. I bet cash in the bank didn't do that!

t33

Thanks for that reply. I have re-checked and I can be more specific - I gave a rough idea above as I thought it would be enough sorry if there has been confusion. Perhaps I have made an error in my calculations? I used a compound interest calculator thing I found online. So this is what actually happened was:

1995 - £14,000 in S&S ISA
2012 - £21,300 withdrawn and closed ISA.

At quite a few years the ISA was worth £8k-£8.5k I'm not sure of which years it was this low as would have to check, but I know it was a fair few when it was below the orignal invested sum. At only a few points was the value more than the withdrawl amount. Partner says no dividends paid and he assumed it went back into the ISA if you see what I mean. There were as far as he remembers a diverse set of things invested in - it would mean going into the attic to find out exactly.

So that is over a 15 year period (when bank interest rates were much better than than have been the last couple of years or so ) a little more than 3% interest?

Thanks.

Linton

t33 wrote: »

Thanks for that reply. I have re-checked and I can be more specific - I gave a rough idea above as I thought it would be enough sorry if there has been confusion. Perhaps I have made an error in my calculations? I used a compound interest calculator thing I found online. So this is what actually happened was:

1995 - £14,000 in S&S ISA
2012 - £21,300 withdrawn and closed ISA.

At quite a few years the ISA was worth £8k-£8.5k I'm not sure of which years it was this low as would have to check, but I know it was a fair few when it was below the orignal invested sum. At only a few points was the value more than the withdrawl amount. Partner says no dividends paid and he assumed it went back into the ISA if you see what I mean. There were as far as he remembers a diverse set of things invested in - it would mean going into the attic to find out exactly.

So that is over a 15 year period (when bank interest rates were much better than than have been the last couple of years or so ) a little more than 3% interest?

Thanks.

If you had simply invested your £14K in the FTSE100 (or the FTSE Allshare or FTSE World) in June 1995 and reinvested dividends, 17 years later it would have been worth about £40K-£50K with an average annual return of more than 6%. So nothing clever or obscure, just a broadly based simple portfolio would have done much better than cash, despite 2 major crashes in the meantime.