The fortunes of Marie Jackson, 45, have fluctuated considerably over the
years. Having lived frugally during a period of ill-health and while
travelling abroad, she is now doing well and her income has risen
substantially over the past year.
Marie is now in a position to save significant amounts and is determined to do
so as tax-efficiently as possible. However, she has received conflicting
advice about how to invest her money, which has left her feeling confused.
“I am now rather sceptical about pensions,” she says. “Are they a good deal or
aren’t they?”
The self-employed artist based in Hampshire has annual income of about £40,000
and is mortgage-free. When she was younger she spent two years teaching
English in Japan, during which time she managed to save enough for a large
deposit on her house. This meant that she required only a small mortgage,
which she has since cleared. The property is now worth about £180,000.
One piece of advice that she has received from a friend is to invest in a
larger property, but she has no wish to do so. “I love my house and it is in
an ideal location for my dog and me,” she says.
Marie has consulted a local independent financial adviser (IFA), who has
recommended funds for her Isas for the past six years, though she admits
that she has tended to choose more risky options than he would like.
About a year ago she joined a local investment club to learn more about how to
invest. Another member lent her an investment book, which has thrown her
into confusion.
She says: “The guide seemed to suggest that you should invest in index
trackers because they will outperform actively managed funds. I also got the
impression that Isas are preferable to pensions because you have greater
control of your money. I am now completely unsure about what to do next.
“I may be able to save as much as £30,000 this year, but the Isa allowance is
only £7,000. So what should I do with my money and how do I stop the taxman
from getting his hands on it?
Ideally, Marie says that she would prefer not to have to work much after age
55 and, despite her doubts about pensions, she invested £18,000 last year in
a self-invested personal pension (Sipp) that is divided between UK and
European index-tracking funds. She also has about £30,000 in a Scottish Life
pension to which she contributes £350 a month. However, she is planning to
move that money into her Sipp and use it to invest in property funds.
She has about £63,000 in Isas. Her holdings include Aberdeen Emerging Markets,
Credit Suisse European Frontiers, Invesco Perpetual High Income, JPMorgan
Natural Resources, Jupiter Emerging Europe, Jupiter Merlin Income, Martin
Currie Asia Pacific and MLIM UK Dynamic. She has recently sold a bond fund
recommended by her IFA and invested the money in Glasgow Income investment
trust instead.
Marie’s available cash consists of about £2,000 in her current account and
£1,000 in an ING account that she uses to save for her tax bill.
She pays about £25 a month into the investment club, on top of the £1,000 she
put in at the start, and now has about £1,300 invested through the club.
This has given her a taste for shares and she recently invested £6,000
equally between Lloyds TSB, BT, Legal & General and Vodafone. “I got
quite a thrill out of investing in shares,” she says.
Marie has no debts. She also has no income protection insurance and would be
forced to live off her savings if she were to fall ill. “I have lived on
very little in the past and could do so again,” she says.
She does not feel that she needs to be rich when she retires and thinks that
she could live on a pension of £10,000.
Marie Jackson: what the experts say
SAVINGS AND INVESTMENT
Mark Dampier, head of research, Hargreaves Lansdown
“Marie has surprisingly little cash. She says she could live off her savings
if she fell ill, but these are in long-term investments and you don’t want
to interrupt these, especially if stock markets have fallen. I would suggest
that she needs a minimum emergency fund of £10,000.
“As to types of investment, In the mature stock markets of the UK and US,
index trackers don’t necessarily do badly, but you get guaranteed
underperformance, and even index trackers have charges that will eat into
performance.
“On the other hand, it is rare to find actively managed funds that beat the
market year in, year out. But a very few fund managers have done so, such as
Neil Woodford, at Invesco Perpetual. UK equity-income funds are an excellent
core holdings and I suggest further investments in Invesco and Jupiter, but
look, too, at PSigma Income and Artemis Income, also run by very experienced
managers.
“Over the past five and a half years, Rensburg UK Select, run by Mark Hall,
has compounded at 20.89 per cent, against the FTSE all-share index’s 8.61
per cent. The cumulative difference is 174.93 per cent against 55.31 per
cent. So some active funds do the job.”
SAVINGS AND INVESTMENT 2
Patrick Connolly, manager, JS&P Towry Law
“My advice to Marie is to build as big a nest egg as she can. When looking at
long-term investing the first step is to come up with a sensible
asset-allocation strategy. The right mix of investments is key, particularly
when assets have been built up, because you don’t want them all falling in
value at the same time.
“Marie has done well with her high-risk investments, but there is no guarantee
that this will continue, and it is possible to accommodate high-risk
investments in an overall strategy and also manage risk. A suggested mix for
somebody with existing assets is 50 per cent equities, 30 per cent fixed
interest and 20 per cent commercial property.
“There are arguments for both tracker and actively managed funds. The most
suitable approach may be a combination of trackers in more efficient
markets, where outperformance is difficult, such as UK and US large
companies, and actively managed funds where there is more scope to
outperform, such as small companies or emerging markets.
“Marie is increasing her risk by investing in individual shares because there
is more reliance on one company. I would advise her to use them, in small
weightings, only as ‘fun’ money if she wants to maintain the interaction
with the investment club.”
PENSIONS 1
Richard Wadsworth director, Fitzallan
“Pension saving is potentially tax-efficient: contributions attract income tax
relief of up to 40 per cent; within the pension fund there is no additional
tax liability on dividends, or interest; and there is no capital gains tax
liability on any gain. If you die before buying an annuity, there is
normally no inheritance tax on the value of the fund.
“If nothing else, pension funds diversify your retirement savings. One also
has a great deal of ‘control’ over pension funds via Sipps and similar
pension plans. True, access to your capital is limited but the tax breaks
are significant compensation.
“To protect her savings from the taxman, Marie should make annual Isa
subscriptions, then put ‘spare’ capital into pension funds — sticking with
index-tracking funds. Only about a third of actively managed funds
outperform the relevant index and they are rarely the same year on year. And
charges for actively managed funds are, on average, higher than on
index-tracking funds.
“I would advise against investing in property funds, as the market looks
expensive.”
PENSIONS 2
Nick Arbin, consultant, PIFC Consulting
“Personal pensions are very tax-efficient methods of saving, particularly for
those in Marie’s position, with periods of high earnings — when she can
claim 40 per cent tax relief on some of her pension contributions — and
possibly a low income in retirement, in which case she will pay 0 per cent
or basic-rate tax on all her income.
“Sipps can be very flexible, offering access to a wide range of investments,
but Marie needs to consider whether a Sipp suits her needs. She generally
favours collective investments, which many insured personal pension plans
offer at a lower cost and with simpler administration than a Sipp.
“Marie should obtain a BR19 state pension projection, giving details of her
expected state pension entitlement and whether she can improve this by
paying voluntary national insurance contributions. This projection is
particularly important because she has lived abroad and may not have built a
substantial state pension entitlement.”
Marie’s response
“I’m beginning to understand that investment is about having a spread of cash,
equities, bonds and property. But while I’m still young I will stay risky
for a year or two. If the market drops I’ll hang in there until it recovers
— it always does — and live on a shoestring, if necessary.
“I am pleased that index trackers got the thumbs up and I note the caution
about property. But I am still iffy about pensions, despite the tax
advantages. I don’t need to lock away money to stop me spending it and it
would be great to die in debt anyway. I have revised my idea of retiring at
55. I’ll aim for 65 and hope that my £50,000 pension fund might be worth
something by then.
“I am not convinced I need access to more cash. In the worst case, I’ll
scrounge off my mum, or sell shares. My investments are accessible, so let
them work for me.”
