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: My husband and I recently downsized and made a profit of £330,000 which is currently sitting in cash. We are both 63 and plan on retiring in two years. What can we do to help grow this as much as possible before we retire? Is now the time to be risky or sit tight?
Answer: Growing a nest egg for our later years is a major focus for most of us, and remember that the growth needs to continue beyond your retirement date and extend throughout what will hopefully be many years of retirement. It is crucial to think about how you can best ensure your pot will last for the rest of your life.
Let’s first consider the potential risk posed by keeping your savings in cash deposits. Historically, leaving money in a bank account – especially when interest rates were high and you reaped the rewards of those higher rates – was considered a good and safe option. However, we should look a little closer at what it means for our money to be “safe”.
Our goal when saving for the future should be both to preserve the value of our funds and to grow them over time. The rising costs of goods and services – inflation – is the main threat to preserving the value of our savings. Inflation is still stubbornly high (with core inflation now at 5.7 per cent) and this will make a big dent in your savings unless you are achieving returns of a similar magnitude. If you can lock in a high deposit rate, this will help to protect your capital, but remember that you do take the risk of the bank providing the rate and only £85,000 is guaranteed by the Government per person per institution.
If the £330,000 from downsizing is in your name, you would need to spread it across four banks to safeguard your funds, or two if you have a joint account with your husband.
Also be aware that most of the accounts offering a higher rate do so for a fixed term only – such as a year – where you will not be able to access your money if you need it in a hurry. These bank deposit rates also tend to move in line with the Bank of England base rate, and this may not be so high in two years’ time when you are planning to retire.
In fact, there is an expectation that rates could start falling in the second half of next year. Therefore, you should consider whether declining (and then potentially low) cash deposit rates are the best home for your money – especially since your time frame is long term and typically investment portfolios outperform cash returns over the medium to long term.
Since you are both aged 63, you won’t get any state pension benefits until a year after you retire (with the full state pension currently set to reach £11,427 a year in April 2024). So if you do both retire at age 65, you will also want to assess how much money you will need for the year when you are not earning a salary and whether you will need to draw on some of your downsizing cash at that stage.
Once you know the answer to the above, it’s well worth shielding any returns you can generate on your pot and making the most of available tax benefits. You don’t say whether you or your husband have other pools of value, such as money held in Isas or personal pensions.
If you have personal pensions (Sipps) and perhaps haven’t contributed much to them recently, you and your husband could both pay into them over the next two to three years using your cash savings – and get a tax-free boost from the Government on top. If you don’t yet both have a Sipp, it is not too late to set them up and benefit from contributing an annual allowance of up to £60,000 a year or the equivalent of your salary, whichever is lower.
To give you an example of what I mean, let’s say your salary is £40,000. You could put £120,000 into a pension over three years, starting this tax year and in the next two tax years before you retire. Your husband could do the same if he earns a similar amount. (You can also be flexible on how much you put in one year versus the next, to match your cash flow needs).
The important thing to note is that between you, however you apportion it, you could potentially move a big chunk of your £330,000 into tax-efficient private pensions before you retire. And if you are lower-rate taxpayers (earning £50,270 or less) to achieve a pension pot of £330,000, you need only contribute £264,000 due to the government top-up. That £66,000 difference is quite a windfall just for being proactive with your money and you would enjoy an even bigger boost if you are higher-rate taxpayers.
So, if you have a personal pension already, you should consider continuing to contribute into it and maximise its overall value – this also allows you to take advantage of the 25 per cent you are able to withdraw tax free at a later date. If you think you will use your full pension allowances in the next two to three years, you could put the rest into an Isa (up to £40,000 a year for a couple), where you will benefit from tax-free growth and have flexibility over withdrawals if you later wish to use these funds to provide an income.
The key is to move as much of your money as possible into tax-efficient wrappers in the next two years and beyond, rather than leaving it in a bank account with no tax benefits and little investment upside.
Finally, you should assess how much risk you are able or willing to take when investing through your pension or Isa. I have written before about taking investment risk that you can afford and are willing to take and which is appropriate for your circumstances.
I also write frequently about following some of the golden rules to help further mitigate against risk and provide the best chance to maximise your retirement pot over time: choosing a low-cost provider (high fees are a killer), investing across a diversified mix of stocks and bonds with an appropriate weighting between them according to the risk that best suits you and your goals (rather than, for example, individual stock-picking) and staying invested over the medium to long term (rather than trying to time the markets).
One last suggestion is that you might find it useful to seek one-off professional financial advice. You are considering an important life event when tailored advice could offer you a significant boost – both financially and emotionally – knowing you have done all in your power to plan for your future effectively and efficiently.
