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Recently divorced Jacqueline Beaumont is primed for a £220,000 pension settlement. What to do with the six-figure sum, however, is proving hard to nail down.
The 66-year-old, who has aspirations of travelling in her retirement, is vying for short-term returns that can uphold her standard of living.
With a state pension worth around £11,500 a year and around £3,000 in savings, the former shop manager is worried she’ll run out of cash.
She said: “I enjoy the finer things in life, and want the best returns in the short-term.
“I’d like the pension to last me approximately 20 years, so that I could still enjoy my time without being so strapped for cash. That life isn’t worth living.
“The pension settlement money will be in an Aviva account that pays 4.5pc and I’d like to transfer it.
“I’m quite risk-averse, but I’m happy for some of the money to be in a riskier investment.”
Now living alone with her dog in Devizes, Wiltshire, Ms Beaumont has her eyes set on travelling in the coming years.
She added: “The plan is to enjoy my time. I had children late in my life and I’ve now reached the stage where I have the freedom to travel.
“I feel I’ve got a lot of catching up to do, and would love to do it while I physically can. I’d like to go to India.”
Ms Beaumont plans to draw around £12,000 a year from her pension. Once it is fully drained, she will likely look to sell her house and live off the value of the sale in later life.
Prior to investing her funds, Ms Beaumont should first solidify what her priority is for the pension funds.
With a portfolio of £220,000, £12,000 per annum amounts to a withdrawal rate of approximately 5.5pc. Assuming she is also looking to meet that figure in growth, so as not to erode the pension value, she will need to look at an investment strategy that sits more firmly on the higher side of the risk spectrum than it does the lower end.
Additionally, she may also want to consider whether this £12,000 value needs to rise in line with inflation if she is going to be dependent on its spending power.
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If she wishes to attain a growth figure of around 5.5pc per annum, then she needs to consider an investment strategy with 75pc-plus equities. She will want to look at spreading her assets across geographic regions and sectors, but the following options could be useful inclusions within the equity component of a portfolio.
For US equity exposure, the Premier Miton US Opportunities fund is worth considering. The multi-cap fund seeks to invest beyond the typical US names that saturate client portfolios (e.g. the Magnificent Seven). The fund’s investment strategy revolves around steadily compounding returns annually, as opposed to chasing specific high-growth trends and as such its portfolio typically looks very different from the S&P 500.
European equity exposure could be met by the Fidelity European Fund, which can serve as a good core holding within this sector. The fund looks to achieve long-term capital growth and its history of outperformance against its benchmark has been met via stock selection that typically outperforms whilst also offering impressive protection during downturns.
If Ms Beaumont wants to include a global equity fund, Brown Advisory Global Leaders may be suitable within a portfolio. The fund invests in 30-40 companies, which they select with a bottom-up fundamental focus. They look for companies with strong ongoing business models which are efficient at utilising their capital to generate profits.
However, if the idea of selecting funds across asset classes feels daunting, a more holistic portfolio product might be a useful solution. Investment platforms typically offer a range of ready-made portfolios for investors who don’t feel they have the time or resources to confidently construct their own and keep them rebalanced within their own risk parameters.
These off-the-shelf investment products can include actively managed funds across various asset classes, geographic regions and sectors. For the more cost-conscious, it might be wise to choose a ready-made portfolio that combines an active asset allocation with low-cost passive fund exposure.
Whichever style of investing she feels comfortable with, it is important she is also comfortable with the risk level she takes.
She may need to compromise on the level of income she withdraws from the portfolio if she wants a lower risk investment style, and avoid excessive capital erosion. Additionally, Ms Beaumont should also keep an eye on her cash levels prior to investing further funds. As a general rule, it is best to hold between six to 12 months of your planned annual expenditure in cash, so she may want to top this up further before exploring the markets.
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Travelling in retirement is one of the most common objectives I see.
Having received a pension pot following a pension sharing order, Ms Beaumont should first review whether the pension is in the best place.
Just because the current pension is not currently providing the required level of returns, it doesn’t necessarily mean that she needs to transfer the pension. It may just be that the underlying investments need reviewing and changing. What are the investment options available to her? Is it cost effective?
It’s also important to establish the taxation of the pension. Provided the pension was uncrystallised before the pension sharing order, she can take 25pc of the pension tax-free with the remaining 75pc being liable to her marginal rate of income tax.
If the pension was crystallised however, the entire pension will be liable to tax. Establishing this will help determine how she draws from the pension over time. She could take the full pension as a lump sum, however, she would be heavily taxed on this which isn’t favourable.
Given the objective is to maximise returns, she may be more inclined to consider higher-risk, higher-reward investment options.
While Ms Beaumont needs to draw an annual income and she is thinking short-term, she wants this money to last for 20 years so it’s likely that the remaining pension that isn’t drawn will be invested for a long-term time frame.
Therefore, in order to have a chance of keeping up with inflation, investing would be a sensible option.
To provide Ms Beaumont with peace of mind that she can go travelling and that this is affordable, cash flow planning would be invaluable.
Cash flow planning is a way to visualise your current financial plan and project this forward, allowing for assumptions, to see if any shortfalls occur. It is also a way to model different scenarios and stress test the plan, for example in the case of higher outgoings or a market crash.
A financial adviser will be able to review the pension provider, discuss investment solutions and build and refine her own cash flow plan.
Given her willingness to take on more risk for potentially higher returns, a financial adviser can also help tailor an investment strategy that aligns with her goals and risk tolerance.
2024-10-02T14:02:27Z dg43tfdfdgfd