Anthony Whitbread (pictured below), a 53-year-old from Norwich in Norfolk, hopes to retire in seven years, aged 60. He is keen to ensure he’s making the most of his savings given the current low interest rate environment.
Anthony earns £21,500 a year, working four days a week as a buyer for a large independent retailer in East Anglia. In his spare time he is a keen walker. His wife earns £8,000, and the couple live with their 12-year-old daughter in a house they own (there is no outstanding mortgage). They have disposable income after expenses of about £500 a month.
Through a combination of saving and inheritance, the family has accumulated savings and investments totalling £305,000. These are divided as follows:
- £50,000 in an easy-access savings account
- £50,000 in Premium Bonds
- £100,000 in cash Isas
- £30,000 in a fixed-term savings bond
- £50,000 in two Santander 123 accounts
- £25,000 in a share portfolio.
Anthony also has a deferred final salary pension scheme in place that will give him about £14,370 a year in income at age 60.
This is where independent financial adviser Joe Dunn steps in (pictured below). He is the founder and director of Iceni Financial Advisers in Norwich, which offers independent advice on pensions, investments, mortgages, insurance, personal taxation and loans for businesses. Here is what he has to say.
Pay more into his pension scheme
Anthony should start paying heavily into his company pension scheme, as the one his employer uses is good, with reasonably low charges.
His employer currently pays in £164 a month, which is the maximum it will pay in, while Anthony contributes £82 a month.
The most recent projection showed he could expect the pension fund to be worth £109,000 at age 65. This could be converted into tax-free cash of about £27,360 and a yearly pension of £4,410.
But as Anthony only has seven years until he retires, he could make the most of the tax breaks that pensions give now. This includes using any of his unused annual pension allowance for the past three years. I would suggest Anthony takes the £50,000 he has in an easy- access savings account to fund this.
In seven years’ time he could then receive 25% of the funds back as tax-free cash and use the remainder to either support his income or to pass on to his family.
Anthony says: “I didn’t realise there was an option to claim back the last three years’ annual pension allowances, so I will definitely look into this; it’s a great option for me.”
By investing in a buy-to-let property, Anthony could have a sizeable asset to pass on to his daughter. He could also use the rental income to subsidise his retirement income.
The property would ideally be bought in joint names with his wife to make the most of tax allowances. But under current rules, the property would be liable for capital gains tax if Anthony later sells it and makes a profit. It could also be liable for inheritance tax when he dies.
Moneywise says: “If you’re married or in a civil partnership and your estate is worth less than £325,000, you can transfer any unused threshold to your partner when you die. This means your total threshold can be as much as £650,000. People other than your spouse who you give gifts to, such as property, might have to pay inheritance tax (IHT), but only if you give away more than £325,000 and die within seven years. Anything outside this remit normally incurs a 40% IHT charge.”
With a £50,000 deposit (plus £10,000 for associated costs) funded by cashing in some of his Isa money, Anthony could expect to buy a £200,000 property in Norfolk that would yield rent of approximately £900 a calendar month. TheLeek United Building Society offers a 1.99% mortgage for two years at the time of writing, with an interest-only payment of £248.75 a month.
However, Anthony should be made aware of the aggressive stance the government has taken on second property homeowners and landlords. The taxation of buy-to-let properties is set to become higher over the next few years.
Anthony says: “This is an idea I’ll think about in future, but it’s not for me now for a number of reasons. My key concerns are that if the base rate rises, this will mean higher monthly mortgage repayments; property prices are also high, which could be a bubble. I also recently read an article that suggested you need a number of buy-to-let properties for it to be a worthwhile investment. Plus my cash Isas are locked into fixed- interest accounts with between eight months and five years until maturity, and if I withdraw the cash early I’ll lose the interest I’ve earned.”
Maximise tax-free investments
Anthony enjoys looking at the markets and building a stocks and shares portfolio. I believe that he should carry on doing this with the £25,000 he already has in his portfolio. He also needs to be aware that he can place these shares into an individual savings account (Isa) wrapper and still play the markets. By using this year’s Isa allowance of £15,240, and future allowances going forward, it will help to reduce any tax liabilities.
I would also suggest investing the remainder of his savings, which are the £50,000 from Premium Bonds and the remaining £40,000 from cash Isas.
Premium Bonds have an annual prize fund interest rate of just 1.25%, while his other cash accounts are earning him little interest.
Combining the money from the Premium Bonds and cash Isas gives him £90,000 to invest. Of this, I would recommend investing £22,500 into the PruFund Cautious Fund and £67,500 into a custom-built portfolio, using the Old Mutual Wealth platform.
The cumulative growth (not taking into account charges) of the PruFund Cautious fund has been 5% over the past year, 17% over the past three years and 34% over the past five years.
Meanwhile, the Old Mutual Wealth Collective Investment Account can accommodate 10 funds across a range of different asset classes and we can design a portfolio made for growth.
The portfolio to suit Anthony’s risk profile has returned (not taking into account charges): 13% over the past year, 18% over the past three years, and 39% over the past five years.
The additional £30,000 Anthony has in a savings bond should be left until maturity, while there are two options for the £50,000 he has in two Santander 123 accounts. He could move £5,000 out of each account into another savings account as an emergency fund, as the 123 account only pays interest of up to 3% interest on up to £20,000 [Moneywise says: 1.5% on up to £20,000 from 1 November].
Alternatively, he could use the 123 accounts as an emergency fund and skim off the spare £10,000 and use it to fund the PruFund investment.
Anthony says: “I definitely want to invest in a fund in some shape or form, so it’s good to have Joe’s advice on which funds are the most suitable for me; particularly given that there are thousands to pick from. I will undertake some more research into this, but I’m particularly interested in the PruFund given its stable, relatively low-risk nature.”
Write a will
Anthony and his wife should make both wills and living wills – these are an expression of wishes should you be in the position of not being able to make your own decisions. A solicitor will often use this in conjunction with a Lasting Power of Attorney.
Although they are married, having a will in place will make it easier for the surviving partner to arrange the finances should the worst happen. I’d recommend they seek professional advice for this.
Anthony says: “I have a Barclays packaged account that includes a free will-writing service, so I’ve been in touch to request an information pack and I will take it from there. I will seek professional advice if need be.”
“As a whole I feel the advice has been fantastic. I was unsure what to do with a recent inheritance given low interest rates, and I’m also hoping to retire at 60, so I really needed this advice. I have been given the directions for what I should focus on.”
Key recommendations for Anthony
- Save more into his company pension, including funding the last three years’ allowances
- Consider purchasing a buy-to-let property to earn an income from and to eventually pass on to his daughter
- Make the most of tax-free investing to boost returns
- Write a will
None of the above should be regarded as advice. It is general information based on a financial report conducted by Joe Dunn, an independent financial adviser with Iceni Financial Advisers in Norwich.
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