Clive Harper is a retired diplomat who has managed to build up a substantial pot of savings and now wishes to ensure that it can meet all eventualities he and his wife may face.
The couple live in London in their £450,000 house on which they do not have a mortgage. They also own a £300,000 flat, in Mrs Harper’s name, which provides them with a net rental income of £19,827.
One of Harper’s main priorities is making sure that his wife is well cared for after his death. As he suffers from a serious illness, the couple believe it is likely that he will be survived by his wife and Harper wants to make sure that she is comfortably off. They may need to fund care home accommodation at some point.
Harper is willing to take some equity risk with his assets. He envisages a portfolio of assets consisting of 75 per cent equity and 25 per cent cash to achieve their aims.
In addition to their rental income and interest amounting to around £10,000, the couple also take home state pensions worth a total of £10,600 and employee pensions. Harper receives £23,000 from his pension and his wife receives £5,600 each year from her employee pension. This provides them with a gross annual income of £69,100.
Their annual expenditure on items such as holidays and socialising is just under £25,000, leaving them with a large surplus each year. They have no debts and no dependants.
Harper’s main concerns are inflation, volatility and taking on debt. The couple have put their £1.6m pot of savings into a joint bank account. They recently encashed £200,000 saved in a building society, using some to renovate their property.
Although the pair have no life or critical illness cover, they do have a will that specifies that their money will be left to family members and charities.
Gary Villis, certified financial planner at Paradigm Norton, says that Harper and his wife are in a very healthy financial position. “Even if the buy-to-let property is not rented out, they still have enough income to cover their living expenses,” he says.
Villis says that the couple have no need to weight their assets so heavily in equities. “They can take a conservative approach to investing funds on deposit,” he says. “We would not recommend Harper exposes himself and his wife to much volatility.”
Instead Villis recommends a lower weighting in equities and a broadly diversified portfolio, including gilts, bonds, overseas commercial property and perhaps a structured product that could offer protection in volatile times. Investing in cash long term is a risk because the effects of inflation erode the money’s purchasing power.
“The best way to protect cash savings from the effects of inflation is to buy some NS&I index-linked certificates,” says Villis. “They can save £15,000 into the three-year certificate and the same again into the five-year certificates, which are paying 5.75 per cent net.”
The cost of full care in a residential nursing home is expensive and could easily be £1,000 per week – £52,000 a year – according to Villis.
Andrew Swallow, chartered financial planner at Swallow Financial, says live-in help can be an alternative to nursing homes, as many people prefer to remain in their own property long term. This can cost anywhere between £15,000 and £50,000 a year, and Swallow thinks the couple could easily cover this with their assets. “They have clearly worked hard in their lifetimes and they should now reap the benefits of their capital over the coming years,” he says.
Swallow also believes proper asset allocation could help the pair achieve their goals. “The key to a balanced investment portfolio is to have a range of uncorrelated investments which will perform reasonably well whatever the economic climate,” he says.
Swallow suggests the couple invest 25 per cent of their savings in commercial property. He also recommends a mixture of passive and active equity funds for half Harper’s portfolio and a heavy element of National Savings investments.
Leith Stuart, certified financial planner at Fitzallan, says that if Harper died and his pension ceased in its entirety, his wife’s pensions and rental income would probably be enough for her needs.
If all the capital and income from the couple’s £1.6m were invested, it could provide them with around £67,000 per annum net for 30 years. This, Stuart calculates, should be enough to provide them with their income requirements for the rest of their lives.
They could restrict themselves to cash and dated government stock without imperilling their financial situation to a significant degree. However if they are interested in investing in a range of assets, Stuart recommends using a wrapper to simplify the administration. Wrappers can be a good way to keep tabs on investments and provide a consolidated tax statement each year.
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