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Money Makeover: ‘My adviser said I should leave £360k in cash – should I ignore him?’

·5-min read
Property investing money makeover - John Lawrence
Property investing money makeover - John Lawrence

The phrase “stockpile your cash” is rarely heard from professional financial advisers – and with good reason. Inflation can have a devastating impact on cash, eating away at spending power. Inflation hit 9.1pc this week, the highest level for 40 years, meaning that £10,000 left uninvested will fall by more than £900 in real terms over the course of a year.

But Valerie Fyfe, 85, and her husband, Iain, 86, from Worcestershire, said they had been told by their adviser to leave £360,000 from their house sale in cash since September 2020.

Mrs Fyfe, who describes herself as fairly risk averse, said that, though she didn’t strive for high-octane growth, she did still want “steady and unspectacular returns” from investments that would at least not lose her money. She said she feared that, left in cash, her money would fall in value and have no chance to grow.

She said: “I’m getting a bit anxious. I have asked why it needs to stay in cash but I’m getting nowhere. He advises us to sit tight and do nothing because the market is too volatile.”

Mrs Fyfe said she had even requested £20,000, the annual Isa allowance, to be transferred into each of the couple’s Isas before the end of the tax year this April, but her adviser had failed to make the transaction in time.

“I’m cross about it because I did ask but nothing was done,” she said. “I want to know if I’m getting bad advice and should be investing my money in funds.” Mrs Fyfe would also like to know how much she has already lost in real terms to inflation.

The couple spend £1,578 a month living in neighbouring flats on a retirement estate and have pension income of £2,323 a month. In total, across investment Isas, Premium Bonds and cash savings, they have £765,000. They have three children, to whom they plan to leave their remaining savings.

Peter Cranwell, director at Purely Pensions

Since 2020 inflation has already caused the Fyfes to lose more than £30,000 of that £360,000 figure in real terms, assuming they are not receiving any interest. Inflation is predicted to rise this year before settling closer to 2pc by 2024, so leaving that money where it is could mean losing close to £130,000 over the next 10 years. Having that much money in cash is not going to bring any of the steady and reliable growth that the couple want.

They have enough income to cover their needs and should keep emergency cash for long-term health needs. But they need to ensure they get the best return on their savings, while staying in their preferred low-risk investments.

We should look at what the Fyfes want to do with the money to decide on how to invest it. In this case, it’s about preserving value as an inheritance. Beating 9.1pc inflation by investing mainly in shares would not fit their risk profile.

A better option would be to put their savings into an investment bond. Mr and Mrs Fyfe and their three children could all be listed on the same plan, which means the bond would simply continue to run in the children’s names once they die. If the children wanted to access the money, they could simply sell the bond.

Discounted gifts are a good example of the benefits investment bonds can offer, as the investment can be passed on to their children, becoming exempt from inheritance tax after seven years.

Isas have a £20,000-a-year limit so investing the £360,000 would be time consuming. Buying another £50,000 in Premium Bonds should be considered.

The couple do need to work on their portfolios. Mrs Fyfe’s £148,000 Isa and Mr Fyfe’s £138,000 Isa have a lot of crossover in terms of funds. Also, some of the picks are not beating their rivals. This is the case with Marlborough Multi-Cap Income. The HSBC Global Strategy Conservative Portfolio and Legal & General Multi-Index fund also take too much risk and have lost more money than the market recently.

As their main goal is to ensure their children can benefit from their savings, part of the solution lies in making sure that their wills are drawn up correctly.

Dennis Hall, chartered financial planner at Yellowtail Financial Planning

Cash is only protected up to the first £85,000 per person, per institution. Assuming it’s a joint account, £170,000 of their £360,000 is protected. The 2008 financial crisis taught us that banks can fail, so the first priority is to open at least one other joint bank account elsewhere and split the money between them.

Their next big question is whether to invest. It’s a tough call. For most of 2022, cash has been king, despite low interest rates and high inflation.

We don’t know what the future holds, so we must make some assumptions and apply common sense. I think a large proportion of their savings should remain in cash. At their age, health can deteriorate quickly and it is sensible to account for potential care costs.

It might not always be the case that their income exceeds outgoings, particularly when one of them dies, leaving the other with a drop in pension income. I have several octogenarian (and nonagenarian) clients who are invested in shares, but they also hold much higher levels of cash than someone still working.

With much of their savings staying in cash, we should question the investment portfolio. If this is essentially a legacy to their children, they can invest more in shares than they do now.

A couple of the existing funds are performing poorly and are dragging performance down. Over the past five years the Prudential Risk Managed fund and the Marlborough Multi-Cap Income fund have returned around 2pc, the same as cash. The other funds average around 10pc, so not significantly better.

By comparison, something such as the Vanguard LifeStrategy 80pc Equity fund has delivered around 25pc over the past five years. They should sell the poorer funds and reinvest into Vanguard.

If markets fall at the time the children inherit, I am assuming they are in a ­position to hold on until better times return.

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