Media Centre

20th February 2016
'I was spooked and lost out big time'

Mr Mrs Street

Written by: Holly Thomas

Mike Street and his wife Jen consider themselves to be reasonably sophisticated savers and investors, having built up decent pensions and saved to ensure they have a nest egg in retirement.

The Streets own two properties outright — their home in Mirfield, west Yorkshire, worth about £220,000, and a holiday home in the coastal town of Bridlington valued at about £90,000.

Mike, a 70-year-old former teacher, still works part time, earning £5,000 a year. He has a teacher’s pension worth £14,240 a year, a local government pension of £1,900 a year and his state pension of £7,150. His wife Jen, 68, a retired teaching assistant, receives a reduced state pension of £4,250 and a local government pension of £4,000.

In addition, they have solar panels on each property, giving them an extra £5,000 a year, tax free.

The couple have invested consistently in Isas. They each have a stocks and shares Isa with Hargreaves Lansdown, with a combined value of about £200,000. Mike’s Isa is invested in Lindsell Train UK Equity, CF Woodford Equity Income, Jupiter European and Lindsell Train Global Equity. Jen’s money is in CF Woodford Equity Income, Jupiter European and Lindsell Train Global Equity.

Each month Mike adds £100 to the Woodford fund and £25 to the Lindsell Train UK Equity. He pays £50 into his wife’s Isa, which goes into the Woodford fund. Mike says: “I picked these funds and have been very pleased with their performance. I know the markets are volatile but I’m not worried. I made the mistake years ago of getting spooked by market shocks, pulling my money out and therefore crystallising my losses. I lost out big time in the end.”

They have a Nationwide FlexPlus account to cover household finances and a higher-interest savings account in which they hold £5,000.

Mike and Jen would like to know what arrangements they need to make for inheritance tax (IHT). Mike adds: “We are also aware that it’s likely we will need to pay care home fees.” They have arranged ownership of their properties as “tenants in common” giving them an equal share of half each. The tenants in common arrangement means they won’t have to sell their home if they go into long-term care. They also pay £25 a month into bare trusts, each valued at £6,000-£8,000, for their grandchildren.

The experts’ advice

Spread the risk
Sam Holder, chartered financial planner, Chelsea Financial Services:

“The investment funds that Mike and Jen hold are decent-quality active funds. But their Isa portfolios lack diversification because they have more than £200,000 spread across the same four equity funds.

“We would usually suggest that this amount of money is invested across a larger number of funds and, as capital protection is probably an important consideration for them, diversifying the portfolios more geographically and into other asset classes.

“With markets so volatile at the moment, they may like to consider funds in the targeted absolute return sector, which limit exposure to equities but open up other regions and asset classes. Funds in this space aim to deliver positive returns with low volatility over a stated time period.

“If the market does rise strongly they will tend to lag behind but offer more protection when markets are falling. Aviva Investors Multi-Strategy Target Income, Henderson UK Absolute Return and Old Mutual Global Equity Absolute Return Hedged are all worth a closer look.

“Mike and Jen are also topping up their largest holdings with monthly savings, so to avoid increasing their dependency on one fund, they could consider topping up one of their smaller holdings.”

Build an emergency fund
Ben Willis, the head of research, Whitechurch Securities:

“Mike and Jen’s estate falls within the inheritance tax [IHT] joint nil-rate band. However, their regular Isa savings are increasing their asset base and this could cause a potential IHT liability later.

“Their Isas are invested with excellent fund managers, but they are only in a few funds and 100 per cent in equities, which is high risk. They could start by redirecting monthly savings into other asset classes such as bonds, property and absolute return funds. Diversification could also help to fund care later in life.

“Mike’s income and Isa means he is a long way towards this. Jen could have a problem because of her lower income. Jen will need to invest more into her Isa and a diversified blend of assets could generate healthier, risk-adjusted returns over the long term. I would also suggest increasing their savings to establish an emergency fund — I would recommend three months’ income, roughly £10,000.” 

Plan for long-term care
Hannah Edwards, commercial director, BRI Wealth Management:

“No IHT planning is required at this stage as the first £325,000 of assets passing on death to beneficiaries is nil-rated for inheritance tax purposes.

“The potential IHT liability for Mike and Jen can be calculated by subtracting their combined nil-rate band of £650,000 from the value of their total current estate, around £520,000, which gives a remaining unused nil-rate band of £129,381.

“If we assume they will both require care, after taking into account their pension income, the funds within Isas could provide for eight years of care. The second property could provide for an additional three years. Their residential property could also provide for care funding.

“If their health deteriorates and they need care, the portfolios should be moved into lower-risk investments such as fixed interest.

“They should keep their wills upto date to ensure their estate passes according to their wishes. It is also important that they consider effecting a Lasting Power of Attorney [LPA]. This will ensure that their financial affairs will be looked after by someone they trust if they cannot do that themselves. In such a scenario, having a LPA in place avoids the cost and delays associated with applying to the Office of the Public Guardian.”

Mike and Jen’s reaction
“It has been a real eye-opener that we need a greater spread of funds. I plan to move 10 per cent of our holdings to some targeted absolute return funds and redirect the monthly top-ups into these new funds. Our second project will be keeping on top of inheritance tax planning.”