John Miles, 89, wants to invest £130,000 in low-risk investments for income for his children
In our Money Pit Stop series, we put your investment questions to an expert to give you a free portfolio makeover.
Featured in this installment is John Miles, an 89-year-old retired driving instructor, who wants to know how best to invest £130,000 at low risk to provide income for his children.
He also asks whether it is best to invest the sum in stocks or investment funds.
On hand to help is Ryan Hughes, head of fund selection at investment company AJ Bell.
John says: I used to be a driving instructor but now I’m living comfortably in retirement with the mortgage all paid off and receiving income from numerous pensions.
Now at aged 89, I am seeking to invest £130,000 in the capital markets indefinitely for income for my offspring. The sum is currently invested in a host of stocks and shares in Isas, but I am open to investing in other vehicles. I would prefer it if my money is invested in something that does not require constant reviewing.
I would appreciate guidance on where would be the best place to invest for income at low risk
John, 89, Lancashire
FIND OUT HOW TO GET YOUR FREE PORTFOLIO MAKEOVER BELOW
JOHN’S SAVINGS AND INVESTMENTS
Risk appetite: Low
Shares: £130,000 worth of shares in Applied Graphene Materials, AstraZeneca, Aviva, Barclays, The Berkeley Group Holdings, British Land Co, BP, Capita, Carillion, Equiniti Group, GSK, HSBC, Land Securities Group, Legal & General, Lloyds Banking Group, National Grid, Next, Persimmon, Petrofac, Rio Tinto, Royal Dutch Shell, Sainsbury’s, Shires Income, Smith & Nephew, South32 Limited, SSE, Taylor Wimpey, Unilever, United Utilities Group and Vodafone
Mortgage: Paid off
Other outstanding bills: None
Ryan Hughes, head of fund selection at investment company AJ Bell, says: The first thing to consider is whether you have any immediate need for the money that may take priority over your objective of providing an income for your offspring.
John, you say you are living comfortably in retirement and have paid off your mortgage in full. This suggests that you do not have any outstanding debt or any immediate need to dip into the £130,000.
Another important consideration is tax and the implications of giving the income to your children.
The £130,000 is currently invested in Isas, which is a very tax-efficient environment because any income received and capital gains will be tax free.
Name: John Miles
Occupation: Retired driving instructor
Investment aim: To turn an £130,000 lump sum into an income for his children
In terms of distributing the income to your children, there are potential tax implications to be aware of.
You are allowed to give away £3,000 worth of gifts each tax year without creating any potential inheritance tax liability, which you could use with your children.
Anything above that would be counted as a Potentially Exempt Transfer and potentially liable to inheritance tax if you were to pass away within seven years of making the gift.
It is possible to gift excess income to your children but this has to be in the form of regular payments from your income, not your savings, and they must not negatively impact your standard of living.
This is a complex area and it may pay to take some professional financial advice on the tax implications of anything you do.
Shares vs funds
Moving on to the investment strategy itself, the next two things to consider are timeframe and how much risk to take.
Despite stating a low attitude to risk, if you were to consider higher-risk investments you would have the potential of better returns as your investment time horizon is indefinite and a longer time horizon gives you time to ride out the larger peaks and troughs of the market.
Normally, a low-risk appetite would suggest little or no exposure to equity-based investments. But when combined with the indefinite timescale and a specific objective of investing in capital markets to provide income, I think the focus for the portfolio should be a broadly diversified exposure to a range of asset classes.
Your portfolio is currently invested in a variety of direct stocks. While this provides an element of diversification, there is a considerable amount of overlap.
For example, it includes three of the big banks, the two main oil explorers in BP and Shell and both of the large property companies in British Land and Land Securities.
You also state a preference for investments that do not require constant reviewing. This, combined with the need for greater diversification to lower the risk profile of the portfolio, suggests you should be focusing more on funds, rather than the current mix of direct equities.
Ryan Hughes: Funds are a great way of providing broad exposure to a wide range of companies and investment styles
Funds are a great way of providing broad exposure to a wide range of companies and investment styles. Different funds have different objectives and ways of investing that can then be blended together to form a well-balanced portfolio.
Funds will cost more than holding equities directly because you are paying the fund manager to run part of your portfolio but it also lessens the need to monitor the portfolio so regularly because you are paying the fund manager to do that on your behalf.
Another pertinent consideration is the trading costs associated with selling your current holdings and purchasing funds.
Most platforms will charge a trading fee each time you sell and buy an investment. As you currently hold 31 equities, it might cost you between £150 to £300 to sell those shares – depending on how much your platform charges.
Given that your portfolio is currently valued at £130,000, that might be a price worth paying to align your portfolio more closely to your needs.
Turning to the portfolio structure itself, the first consideration should be the overall asset allocation of the portfolio.
As you wish to take a relatively cautious approach, while maintaining exposure to markets, you could consider investing 50 per cent of the portfolio in bonds, 40 per cent in equity income and 10 per cent in property.
You can adjust this if you are happy to take on slightly higher risk and increase the exposure to equity income.
How John could structure his portfolio
Funds to consider
For the bond element of the portfolio, you could consider the Henderson Fixed Interest Monthly Income fund, which can be a good option for people seeking a high but sustainable level of income.
It currently yields just over 5 per cent each year and the experienced management team focuses on maintaining a consistent level of monthly income.
Other options include the Fidelity Strategic Bond fund, which is run by the highly experienced Ian Spreadbury who has successfully managed fixed income funds over a number of market cycles.
The Invesco Perpetual Corporate Bond fund, is another one that is worth mulling over. The fund’s experienced managers Paul Causer and Mike Matthews are comfortable with investing differently to the benchmark, which has been a key source of returns over the years.
Another interesting option is the Artemis High Income fund that spans bonds and equities. This fund capitalises on the high-quality equity and fixed-interest resources that are at Artemis. Led by Alex Ralph, the investment process has no particular style bias and relies on high-quality stock/bond selection to drive returns.
Further equity income exposure can be gained through the Evenlode Income fund managed by Hugh Yarrow.
With a concentrated approach to UK equities, Hugh is a high conviction manager and is also comfortable looking very different to the benchmark index.
His focus on companies that have the ability to grow sustainably with significant capital has been very successful, consistently outperforming the FTSE All Share Index.
It is also worth considering the Woodford Equity Income fund, which is run by one of the most celebrated fund managers in the industry in Neil Woodford.
The fund has experienced some high- profile troubles with some of its holdings recently but this could be viewed as a buying opportunity.
If you seek to broaden your equity income exposure away from the UK, you could consider a global fund such as the Newton Global Income fund, which is an income-focused global equity fund that aims to deliver rising income distributions.
It might also be worth looking at something more specific such as the JP Morgan Emerging Markets Income fund, which is designed to be lower risk and more defensively orientated than other emerging equity funds.
For property exposure, it is worth looking at the Henderson UK property fund, which provides access to a well-managed portfolio of commercial real estate and aims to deliver a reliable income source.
Alternatively, you could retain your holdings in the British Land or Land Securities investment trusts for your property exposure.
The information provided by our expert is for the purposes of this article and is not personal advice, if you are at all unsure of the suitability of an investment for your circumstances please seek advice.
Nothing in this response constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
GET HELP FROM THE MONEY PIT STOP COLUMN
To be featured, email email@example.com with as much of the following information you wish to disclose. The information you send us will be passed on to the financial expert who will look over your portfolio for free. It will not be shared with any third parties for promotional or commercial reasons.
Copy and paste the following information into an email or download the form here
City or County you live in
Occupation or former occupation if retired
Phone number not for publication
Your investment portfolio
Investment goals: such as retirement income, university fees, housing deposit, holidays, second home
Risk appetite: Low, medium or high – and a short explanation why
Time horizon: one, three, five, 10 or 20 years
What you hold in the following categories:
Funds, investment trusts, or ETFs
Property (and any mortgages)
Other eg premium bonds
TOP DIY INVESTING PLATFORMS