Retirement and Financial Planning

Managing a Pension Pot in a Low Interest Rates Environment.

OK let's state some caveats right from the beginning.  I am not and would not pretend to be a financial expert.  I can also admit to having made some awful financial decisions in the past (Northern Rock shares anyone?). Having said that, I have avidly read the views of well regarded financial journalists and have attended seminars on retirement financial planning as well as taking advice from one or two financial advisors. Not an expert then but someone who has had to think about protecting a modest chunk of capital and hoping to make it last into a long, happy, healthy retirement. (don't you love the optimism?)



The key thing for many people relying on savings is that now with interest rates at record lows anyone with capital which they hope will see them through a long and happy retirement will have to think carefully about managing their money and ensure that this money is working hard for them.  Twelve years ago it all seemed much easier.  I had sold a house prior to moving in with my partner and very quickly found a bank where I could "park" that money and sit back and see the interest come in at around £600 per month.  The interest on the account was just over 5%, inflation was below that and just by finding an account in the Guardian's best buy table I had my money in a secure account that would ensure real term growth without risk or effort on my part. Ah the good old days!

Now, if I had that money, I would be hard pressed to find a home for it that would pay 1% and even then the size of the sum I could deposit would likely be limited.  With inflation set to rise and most savings accounts paying far less than 1% parking money in a bank is really just like saying a long goodbye to your capital.

My Situation

My situation as a retired deputy head  is that I receive an index linked pension based on my final salary.  Teachers currently  also receive a lump sum equivalent to 3 times whatever the annual pension is worth so if a retired teacher had an annual pension of £20,000 he or she would also receive  a tax free lump sum of £60,000.

I have also tried to save over the last ten years knowing that my pension would cover basic day do day expenses whilst whatever capital I accrued through lump sum and savings would be my capital which would need to provide big ticket items such as holidays, car replacement and house maintenance. I also wanted my capital to grow in order to try and beat the eroding effects of inflation and enable me to access some capital to help my grown up children at points in the future where they might need some additional support such as weddings or house purchases.  Above all I knew that once I retired I would effectively stop saving and start spending.  My financial plan was about making sure that the pot of money I was spending from lasted as long as I do!

Go on then what have you done?

OK, OK -I'll tell you.  In fact I shall cut out the waffle and make a list- John's Top Tips for a financially secure retirement.

1 Marry a rich widow. (OK that was my joke entry)


 1  Have a big chunk of money invested in stocks and shares. 

I aim to have between 50-60% of my capital invested in the stock market. There is no doubt that for your capital to grow there really has to be some exposure to the stock market.  Money in a savings account will just mean the value being eroded by inflation. But it is safe in a savings account which is why it is always advisable to have a proportion of your money as cash. 

To buy and sell shares and funds I use the iWeb platform. It's cheap and easy to use.  I have my shares in an ISA wrapper but also some outside the ISA wrapper as a high level before having to pay capital gains tax means that with a modest amount of money invested paying tax on profits shouldn't be a problem. 

I select companies that I believe in and who I think have great products and services and who I believe function ethically.  I also invest in a range of investment trusts including the ever dependable Foreign and Colonial. If I were starting out as an investor I would definitely go for investment trusts. They spread the risk and by and large produce good growth.  City of London and Monks would be my tips in addition to Foreign and Colonial. For me it's about having a spread of investments with some solid dependable heavyweights and then investing in what I think are good companies.  One example is Cineworld. Personally I think Cineworld provide a better experience of going to the cinema than do the Odeon, so I bought some shares and they have gone up nearly 50% in the couple of years that I have held them.  That was luck, but I bought the shares because I liked what the company provide.  Oh, and I tend to stick with companies rather than trying to "call" the market and ALWAYS reinvest the dividends.  This money is tied up for the long term and I know that I will probably not have to touch this for years. A portfolio like this has produced returns of around 9% for the last two years; real growth that my savings accounts cannot hope to match.

2  Use your ISA allowance 

I still think ISAs are worth having despite the recent introduction of reducing the tax on interest earned. The point about an ISA is any money or shares within it will always be exempt from tax.  This means if and when interest rates go higher and the interest earned increases you will keep all the money whereas outside an ISA once you interest earnings exceed £1000 (or just £500 if you are in upper tax bracket) you will have to pay tax on the interest earned.  The thing with cash ISAs is that banks give rates one year and then reduce the following so you have to be prepared to move your money from ISA to ISA and personally I look at fixed rates of one or two years.  Like stocks and shares my ISA cash is for the longer term.

3 Invest in a pension/AVC (additional voluntary contributions)

Although I have a work based pension,  I was advised to open up an additional pension.  In fact I did this even though I only had a little over a year of employment before retirement.  The maths are simple.  Invest in a pension as a higher rate tax payer and you get 40% tax relief.  In effect it meant I received £500 less in my pay packet but £800 went into my pension. This meant I built up a pot worth £11,200 which effectively only cost me £7,000 .  When I want to access this I will be a lower rate tax payer and I will receive 25% of the pot tax free.  So I would get a tax free sum of £2800 plus a sum of £6720 (the remaining amount of £8400 taxed at 20%) giving me a return of £9520 on an outlay of £7000.  Not bad.  I just wish I had started it earlier.  In addition the money is invested in funds and can be counted towards the 50-60% I have invested in stocks and shares.

4   Have multiple accounts to make the most of the savings rates out there.
   
Some money has to be accessible and accessible with low risk.  That means cash in savings accounts.  Rates are dire at the moment so you have to take advantage of every account that gives a good rate.  For me a no-brainer is the Santander 123 account.  It was paying 3% on balances between £3,000-£20,000 but this is due to go down to 1.5% next month.  However, that will still be better than any other current account for those sums of money.  You pay a monthly fee but this is recouped from the standing orders that bring cashback. You need to put in £500 a month and that's what I mean about needing to manage your money and make it work for you.  In this environment you have to be prepared to manage your money, move it around and monitor the rates.  Also check on super saver rates.  Most banks offer savings accounts where you drip feed modest amounts (£250-300  a month) over the course of a year and at the end they pay you interest at rates of up to 6%.  First Direct operate such a scheme and it currently pays 5% which means a return of around £97 on a  drip feed annual investment of £3600.  Leave that money in a normal savings account and you would be lucky to clear £30. 

Other than these two suggestions keep your eyes on best buy tables and be prepared to move your money to where the best rates are.  A bank I like that offer good rates is the fairly new Shawbrook Bank.  It is a bank fully covered by the government's compensation scheme and offers some competitive rates.

5 Consider Peer- to -peer lending

This is a relatively new kid on the block.  Basically you put your money in an account and a company immediately lends your money on your behalf to a set of borrowers who then pay back your money. The result is you get a return much higher than any savings account.  I use ZOPA and the return is around 3.6% p.a.  Your money is basically lent out to a bunch of people you will never see or get to know.  That sounds scary but ZOPA have been doing this for over ten years now and they have a fund to recompense any defaults from borrowers.  The actual level of defaults is very low and after dipping my toes in and seeing how it works I feel very confident with this type of investment.  It's also good in that borrowers get good rates and it cuts out the banks.  When I started with ZOPA they were excellent at explaining things to me and followed up to make sure I understood the process.

6  Invest in your passion

Anyone who has one of these lying around I'll be happy to take it off your hands

If you have a bit of leeway in your finances I think it's good to invest in something you really enjoy.  That way you are receiving pleasure from your money and it may just end up making you money as well.  In my case I like guitars. I do not own any classic guitars but if I had the cash I would be tempted. For others their passion and interests could be classic cars, wine or art. The thing that grabs your interest could equally be an idea for a business or an emerging pop group. For these you can invest by crowd funding or other methods via the internet. This is almost romantic investing, using your heart as much as your brain. And if your investment does not go up in value you still have something you can enjoy or enjoyed being part of.  Helping others get started can be risky but it can also be extremely fulfilling.

7 Give it Away

Finally, if you have more than you need, consider giving some of your money to charities and good causes.  Your capital will decrease but your sense of well being should increase considerably! And don't forget to Gift -Aid any donations.

OK that's it from me.  This was the post I was slightly dreading as it is all a bit matter of fact.  But money is important, not in itself but as a means for letting us do the things we want.  I would love to hear what other people think about my suggestions and the other ways people have of protecting and growing their money. 

Like many of you reading this, I have worked hard, I saved. I have looked after my money and now it's time to spend (cautiously). That's a great feeling. How much for that Jimi Hendrix Stratocaster?

Let me know your thoughts
Take care
John