In our weekly series, readers can email in with any question about their finances to be answered by our expert, Charlotte Ransom. Charlotte has 30 years’ experience working in financial services and wealth planning, including 10 years as a partner at Goldman Sachs. She co-founded Netwealth, which specialises in low-cost investing and financial planning advice. If you have a question for her, email us at money@inews.co.uk.
Question: I have just sold a rental property as my fixed term was ending and it would have proved difficult to get a decent return with interest rates soaring. After clearing the mortgage, I have a pot of £460,000 and am debating what to do with the money. Do I let it earn decent enough returns in a bank account now or do I need to be more proactive to help me fund my retirement in 15 years?
Answer: Generating promising returns is more of a challenge for property investors now, especially those nearing the end of a favourable fixed rate mortgage term. Many clients who come to us have found that the previous attractions of buy-to-let are no longer as obvious, whether from a pure financial perspective, the hassle of maintaining a property and managing tenants, and also juggling budgets when a residence is unoccupied.
In terms of what to do with the lump sum, the environment is different today from in the past. In previous years, for those with a reasonable cash sum, investing made the most sense: markets were on the rise, returns from savings accounts were close to zero, and you would effectively lose money each year that you stayed in cash due to the impact of inflation, despite its relatively low rate.
Now, however, interest rates are substantially higher and some banks are offering improved deposit rates, albeit with a significant gap between what they charge customers to borrow from them. As a rule, for those still in work, we would generally recommend you keep enough money in an easy access savings account to last you for three to six months as an emergency fund should it be needed. Now, at least, you are somewhat better compensated for doing so.
But if you are looking to park a larger amount you will need to be very clear on the small print. At first glance the deals on offer seem tempting, but when you look closer you will find certain restrictions such as time limits and a cap on the amount you can invest.
Whilst cash deposits are more attractive than they were in the long term, the impact of inflation shouldn’t be ignored. It sounds as though you have earmarked this money for your retirement pot and will not be touching it for 15 years.
If that is the case, it’s likely that the best course of action is to invest and to earn the benefits of stock and bond market returns over that period, accepting that these returns may be more volatile in the interim but producing better long-term returns over time than staying in short-term fixed rate bonds or deposits.
When thinking about investing for retirement it’s important to think about matching up your investments with your time horizon. If you plan to purchase an annuity at retirement then you will need a lump sum at that point and so you may want your investments to become less volatile over time to align with this need.
If you plan to stay invested during your retirement and generate an income then the 15-year point is less significant. You will instead be investing for many years beyond this point and only drawing a relatively small proportion of the funds each year.
For lots of people it will be a split between the two where you might want a lump sum at retirement, for example to pay down a mortgage, and then an income stream thereafter. So make sure you match up your investment strategy with your plan.
How you actually invest your money to align with your plans and investment strategy is the next decision to take. There are numerous DIY sites that allow you to pick and choose your own investments across an enormous range of stocks, bonds and funds. This suits some people who are keen to manage their own portfolios and, depending on the underlying assets you choose, can be the lowest cost way to invest. However, self-investing is not for everyone – you may not have sufficient time, interest or knowledge (or all of the above) and that is when it’s worth looking at groups who will manage your money on your behalf.
At the core, I would suggest that we all do something similar to one another – we invest in diversified portfolios of global bonds and equities to help drive relatively consistent, inflation-beating returns over an investment period, often providing a choice of risk level that lines up with a client’s goals and risk tolerance.
The key difference in approaches can be whether these managers implement their views through active managers (those who proactively aim to outperform a benchmark and who will charge higher fees as a result) or through passive funds (these are more simple trackers which are designed to follow chosen indices at very low cost).
At Netwealth, we have chosen the latter route, partly because it is very hard to find the outperforming manager before they outperform, and once outperforming they tend not to be able to continue for an extended period. We also believe that low-cost implementation is a critical path to long-term outperformance and this has been our experience since launch in 2016 and through many different market environments. There is now telling third party research that bears out this philosophy.
Beyond the underlying fund manager fees, there is also the question of what you are charged on top for the annual management charge, custody, tax reporting, and trading – and whether VAT is included in whatever you are quoted. Overall, whoever you choose to work with, you shouldn’t need to pay more than 1 per cent a year in total fees to have someone invest on your behalf. If you decide also to take financial planning advice, that should be accessible separately and may be something to consider as you approach retirement.
In case you are concerned about market volatility, or timing of your investment from cash, you don’t have to invest everything at once. Some clients prefer to invest gradually and drip-feed their money into their investment pot. This approach means you are less exposed to a single entry price into the market which is helpful when markets are falling; but if markets rise while you stagger your investments, your average entry price will be higher on average.
I would suggest, therefore, not to leave all your money in a bank account at this stage. As we’ve discussed, you appear to have this money earmarked as a key part of your retirement pot and it’s important that you can make the most of it while you are still working. However you decide to invest will come down to how comfortable you are with taking risk and how much risk you can afford to take.
But you also want to avoid the risk of doing nothing and to act proactively to make sure your money continues to work for you to secure that comfortable retirement when it arrives.
