Family investment diary 2014: part three
As part of our series following families investing in 2014, we catch up with them to see how they are getting on half way through the year.
He also broke the news that pension savers are soon to be granted direct access to their pension, giving a much wider breadth of options for generating income in retirement.
From July next year, anyone who is aged 55 or over will be able to take their entire pension fund as cash - although only the first 25% will be tax-free. The remaining 75% of the fund would be taxed at the saver's marginal rate, rather than the current 55% charge for full withdrawal.
We first spoke to our families at the beginning of the year when they made New Year's resolutions to revamp their savings plans and overhaul their investment portfolios.
In our third meeting, we'll find out how the Blythes and the Messiters have fared.
Good start to 2014
Sophie Blythe and her husband Adrian have had a good first half of 2014. At the beginning of the year, they told us they were embarking upon a savings drive to build up enough to pay off the capital part of their mortgage, as well as provide for their future.
The couple, who live in Chelmsford, Essex, with their children Harriet, eight, and Finley, four, have managed to increase the amount they save each month, thanks to Sophie's new job.
Sophie, 39, has been working as a university development manager for the past few months, having left her job as a charity project manager. Her salary in this role was higher – meaning she was able to save a little more – but in the last month she has left the university and gone back to work in the charity sector.
She says: "The salary isn't that much more but my new job is more flexible and closer to home. I used to have to drive 60 miles a day but that's now dropped to just 20 miles, cutting my petrol bills by a third. "The flexible working hours also mean that I can pick Harriet up from school and cut out after-school club costs."
Sophie and Adrian, 39, a paramedic, are invested in the M&G Global Dividend fund. The manager focuses on companies that can consistently grow their dividend yield rather than those that simply pay a high yield.
Recently, manager Stuart Rhodes has moved into US technology firms. These make up 17% of the portfolio against 4% three years ago. Since the beginning of the year the fund has returned 3.37%.
Sophie says: "We are happy with the performance of the fund and will continue to pay in monthly amounts. With the savings on fuel, we could afford to increase payments further." In September the pair will free up £600 a month in childcare costs when Finley goes to school.
Sophie says: "We have a lot to think about in terms of doing the best thing with the money. Our mortgage is interest-only, so we might switch to a capital repayment.
"Alternatively, we could leave the mortgage as it is and continue to build up our investments to repay the capital at the end of the term. In this case, we will be able to increase our regular investment payments substantially."
Interest-only mortgages are few and far between these days, so the pair are keen to protect it. They are also aware that interest rate rises are on the horizon, and these will increase their tracker mortgage repayments.
Sophie and Adrian want to keep their current deal as long as they can to avoid remortgaging – new mortgage rules born out of the mortgage market review mean that affordability criteria is getting tougher. Borrowers will have to provide more evidence of their income and are grilled about their spending habits.
"We don't want to have to go through that if we can avoid it. Plus we are on a great deal now. We just hope interest rates don't climb too quickly."
Adjusting your strategy
David Messiter and his wife Tui have been adjusting their investment portfolio after discovering some funds were underperforming.
The couple are replenishing their reserves after moving to Norfolk from their Essex home last year - which meant emptying their savings accounts.
David watches their investments closely, reviewing his holdings frequently. He has recently sold out of a south Asia fund and plans to buy into star manager Neil Woodford's new fund, Woodford Equity Income, which launched at the beginning of June.
David, 40, says: "I did very well out of Neil's Invesco Perpetual equity income funds and hope he can grow my money again at his new firm. His 25-year track record is remarkable. I have held on to the Invesco funds, which I still believe will work well for me."
Woodford often holds companies for 10-years plus, and has a high conviction, contrarian approach. He says that through a mixture of attractive yields and capital growth, investors will see good returns over the next few years from his portfolio.
David, who runs an IT company, and Tui, who stays at home to look after their daughters Lila, five, and Amelia, two, are renovating the house they bought, which means they are spending some of the cash they would otherwise save.
David is paid quarterly bonuses and last time invested the full sum straight into equities.
This time, he plans to use half to top up his Isa investments now the new limit of £15,000 has kicked in, and the rest to spend on the house.
He says the new pension rules announced in the Budget spurred him to review his pension arrangements, too.
"The fact that I will be able to access my money – rather than be forced to buy an annuity – means I feel far more inclined to save larger amounts in a pension. In fact, I have increased my monthly contributions by around £300 a month."
David previously worked for Vodafone and so as part of his employee package holds shares. He decided not to sell the shares he gained from the company (or from Verizon) after the firm offloaded its stake.
"I believe both businesses will continue to strive. I used the cash payment to pay for new guttering."
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
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).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
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.