Investing in your 50s - the family with teenagers
How should you invest once you're in your fifties? That's the question we look at in the last part of our three-part series on where to invest your money at different stages of your life.
In our first case study of this series, we look at the options for a family with teenagers and ask financial adviser Mel Kenny to make some suitable fund recommendations.
Case study: Tony and Pam McKinley and their teenage children
The McKinleys are at a busy stage in their lives. Tony is a higher-rate taxpayer with a large company pension, while his wife Pam works part-time and has a small pension fund. They're both in their early fifties, with teenage children (Andrew and Caitlin) living at home.
Tony earns £85,000 as a company director and Pam receives £18,000 as a PA to the chief executive of a small building firm, so they don't have a pressing need to increase their income. Their financial goals are therefore based around growing their capital.
Since entering their fifties a couple of years ago, however, they have started to be concerned about the amount of money they have set aside for their future. While not gung ho, they are happy to take on board a certain amount of investment risk in order to beat bank deposit returns.
Investing for capital growth is Tony and Pam's goal, but they have little in the way of savings and therefore need to be able to access funds in case of emergency. They therefore need to use their ISA allowances (£11,280 each in 2011/2012), which will enable them to invest a total of £22,560, including up to £5,640 each in cash ISAs tax-efficiently this year.
If Tony is likely to be a higher-rate taxpayer in retirement, the couple will also need to consider putting any additional pension savings into Pam's name, as her small pension means her personal allowance (£7,475 this tax year) is unlikely to be used in full during retirement, so she may well be a non-taxpayer.
As far as investments are concerned, the McKinleys accept that investing for growth will involve a degree of risk. However, they are unwilling to gamble everything, given their relatively limited investment time horizon, so diversification and risk control are also important.
Newton Real Return
Kenny says: "This longstanding fund invests in a range of asset classes and derivatives to create a smoothed return; it has achieved its aim impressively to date. The fund enjoys a highly commendable 'A' rating from Old Broad Street Research (OBSR)."
IFDS IM Distinction Diversified Real Return
"This fund aims to deliver at least 4% above inflation annually over a seven-year market cycle, and the manager invests across both traditional and alternative asset classes.
"Although the fund has a good track record to date, delivering good returns with low volatility, it is relatively new, with no recognised industry ratings, so some caution is required."
Blackrock UK Absolute Alpha
"Although this fund will lag in rising markets, the aim is to produce a positive return in all market conditions by investing in UK equities and derivatives to create a smoothed return - which it has done to date. This fund has also been awarded an OBSR 'A' rating."
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).