Glynn Bilby (pictured above) is a 57-year-old, semi-retired HGV driver from Sheffield. He lives with his wife Kim, a clerk, who is also aged 57 and semi-retired. They have no financial dependents.
Glynn has been drawing on a defined contribution workplace pension since he was 55. This gives him an income of £7,200 a year. He also has £34,000 in his current workplace pension, which he has not taken any money from. He will also receive a one-off payment of £4,000 from a former employer when he turns 65.
Kim has a defined benefit pension from her employer, which is worth £3,000 a year. Both Glynn and Kim are still contributing towards their workplace pensions. In terms of savings, the couple has:
- £36,000 in a mixture of Cash individual savings accounts (Isas) and interest-paying current accounts; and
- £23,000 in direct shares. Glynn and Kim have £13,000 remaining on their mortgage. They owe around £1,600 in car finance, which they pay using a 0% credit card.
They are keen to get some guidance from an independent fi nancial adviser (IFA) as they don’t think they are making the most of their savings.
This is where Raj Shah (pictured below), an independent financial adviser (IFA) and owner of Blue Wealth Capital in Sheffield, comes in to help. In 2016, Raj was shortlisted for Unbiased’s financial planner of the year award and Moneyfacts’ investment adviser of the year award. Raj’s advice for the Bilby’s is as follows.
Keep a rainy-day fund
You should always keep some money immediately accessible to cover any unforeseen emergency expenditure that may arise. I would normally recommend an emergency fund equal to three months’ expenditure within an instant-access deposit account as a bare minimum. Based on the couple’s outgoings, they should keep £10,000 of their savings in cash as an emergency fund.
The remaining £26,000 should be moved into stocks and shares Isas in a bid to boost returns – I explain more on this below.
Glynn says: “We’ve always had plenty put by. It’s a good idea to have something set aside in case of emergency, so we’ll certainly keep doing this.”
Sell the shares and repay the mortgage
I would recommend that Glynn and Kim sell their £23,000 in direct shares as this type of investment is simply too risky. They should, however, consider the potential tax liabilities first.
Moneywise says: Capital Gains Tax (CGT) is applicable to any gains made by selling shares that are not in an Isa.
Gains, other than those made from selling property, are taxed at 10% for basic-rate taxpayers and 20% for higher-rate and additional-rate taxpayers. However, you do have an annual tax-free CGT allowance, which stands at £11,300 per person.
The couple should repay their mortgage early – and my advice would be to use £13,00 from the sale of their direct shares.
Moneywise adds: When considering repaying your mortgage, always check with your lender first if any early repayment fees are applicable and calculate whether the overpayment is worth it.
Glynn and Kim should also consider repaying their car finance in full, if the terms of the deal allow for this and any early repayment fees don’t outweigh the savings made from repaying early.
Glynn comments: “We’re not looking at the car finance yet as it’s not costing us anything on a 0% card. However, we have recently used one of Kim’s Cash Isas to repay the mortgage, so we’re now mortgage free. It has freed up around £450 a month. I don’t want to sell our shares – it’s something I enjoy doing and I have been earning a good dividend.”
Invest remaining savings in a fund via S&S Isas
Now that they have repaid their mortgage and set up a rainy-day fund, if they were to think again about selling their shares they would have £36,000 left in liquid savings, which I would recommend they invest in two Stocks and Shares Isas in each of their names.
This tax year, you can invest up to £20,000 in a Stocks and Shares Isa, and these products provide the potential for capital growth, savings are easy-access, and any gains made are tax-free.
I suggest Glynn and Kim’s Stocks and Shares Isas are set up on the Wealthtime platform because this company is financially strong, its charges are competitive, it provides access to a wide range of funds, which can be switched free of charge, and it has provided our clients with excellent service in the past.
Moneywise says: This platform is only available to IFAs and similar professionals.
In terms of what the couple should invest in, I’ve analysed their attitude to risk using the FinaMetrica risk-profiling questionnaire to determine the most suitable options.
I’ve risk-profiled Glynn’s investment appetite as ‘moderately adventurous’, while Kim’s is ‘moderately cautious’. Both have a low capacity for investment loss as their investment time horizon and financial circumstances dictate that only minor short-term volatility can be accepted before their standard of living becomes affected.
I therefore recommend that Glynn invests in the Vanguard LifeStrategy 60% Equity fund*, while Kim invests in the Vanguard LifeStrategy 20% Equity fund*.
I have recommended these passive funds as they both provide exposure to a range of asset classes and global market sectors resulting in greater diversification and reduced risk, and they’ve performed well compared to their benchmark.
These funds also reflect the couple’s attitudes to risk as the LifeStrategy 60% fund invests roughly 60% in equities (company shares) and about 40% in fixed income securities (government and corporate bonds), while the LifeStrategy 20% fund invests about 20% in equities and about 80% in fixed income.
For me to implement these investments, I would charge an initial set-up fee of £1,479, plus a 1% ongoing annual management fee. The couple would also incur a 0.3% fee from Wealthtime and a 0.22% fee levied by the fund itself. This means a total ongoing charge of 1.52% on the amount invested, excluding the initial set-up fee.
One other consideration to make is that now that they have repaid their mortgage in full, it has released around £450 a month. This means that jointly, there is a disposable income of around £1,780 a month.
The couple could therefore consider making regular investments into their new Vanguard Isas or making additional contributions to their pension plans. Paying into their pensions is tax-efficient and, given they’re paying tax on the pension income they’ve started taking, this would create a taxneutral position.
Glynn says: “I have looked into the Vanguard funds and if I did go ahead with the investment, I would probably just do it using the TD account I hold my shares in. I am also looking into the Scottish Mortgage investment trust*.”
Moneywise says: If Glynn and Kim wanted to set this up themselves, they could use the Cavendish Online investment platform, Moneywise’s platform recommendation for smaller portfolios of less than £50,000. This charges just 0.20% a year on top of the fund charges, so a total ongoing charge of 0.45% on the amount invested. For more details visit: http://ift.tt/2yAvO4v
Scottish Mortgage investment trust would make a good choice for a long-term investment.
Review wills and consider LPAs
The couple set up wills in 2003, so I’d recommend they review these to ensure they’re up to date. Glynn and Kim don’t, however, have Lasting Power of Attorneys (LPA) in place so I’d advise them to consider setting this up.
Moneywise says: An LPA is a legal document that lets you appoint one or more people to help you make decisions or to make decisions on your behalf if you become unable to do so. There are two types: one for health and welfare and one for property and financial affairs. You can choose one type or both. It costs £82 to register each LPA at the Office of the Public Guardian.
In terms of whether the couple need any insurance products, this is something I would need to look into further if the couple decide to use my lifetime cashflow modelling services as part of their money makeover.
Glynn says: “Our wills were written in 2003 so will need updating. When we do this, we’ll ask about setting up LPAs too.”
On the overall Money Makeover experience, Glynn adds: “It has encouraged us to think about our position and it has flagged up some helpful issues such as updating our wills and setting up LPAs. However, I enjoy looking at shares and investment trusts and doing my own research, so I’m not sure I would ever pay for financial advice.”
*The Vanguard LifeStrategy 60% Equity and Vanguard LifeStrategy 20% Equity fund, as well as the Scottish Mortgage Investment trust, are members of the Moneywise First 50 Funds for beginner investors.
Key recommendations for Glynn and Kim:
- Maintain a rainy-day fund
- Repay their mortgage
- Invest remaining savings in Vanguard funds using Stocks and Shares Isas
- Review wills and consider getting Lasting Power of Attorneys
Would you like a FREE money makeover?
This article was written in response to a reader’s financial situation. If you would like a free money makeover, which will appear in Moneywise, email editorial@moneywise.co.uk or fill in our online Money Makeover form. We will try to arrange a one-to-one meeting for you with an FCA-regulated independent financial adviser in your local area, who will discuss your financial concerns and goals for the future, and draw up a bespoke financial plan for you.
None of the above should be regarded as advice. It is general information based on a financial report conducted by Raj Shah, an independent financial adviser (IFA) and owner of Blue Wealth Capital.
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