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Should I switch more savings into cash now I’m 57?

Mark Wilson is taking a big gamble on winning the jackpot with so much in Premium Bonds, writes Charlotte Gifford

In the long- term, research shows that equities will beat any returns you can get on cash. However, with cash now offering rates of more than 5pc, many savers are re- evaluating their portfolios.

Mark Wilson, 57, has saved up for years to help with a house move, and to supplement his income in retirement. He has £46,000 in Premium Bonds, as well as almost £17,000 in four fixed-rate savings accounts, and £9,400 in a stocks and shares Isa.

“The Isa is invested in CT UK Equity Income and Fidelity Special Situations,” he said. “I don’t know whether these funds are the best place for my money right now. There’s a lot of UK exposure in there. Should I increase my exposure to cash?”

Financial advisers generally recommend not to invest money unless you are willing to part with it for five years or more. Mr Wilson anticipates having to tap into his pot during this time for home renovations at his current home, or his next flat. He is in the process of selling his flat in Chippenham so he can move to Bath, where he hopes to retire in the next couple of years.

“I would like to know if retiring soon is feasible, and where I should invest my savings,” he said.

Mr Wilson has an index-linked pension paying £860 a month and an NHS pension of £ 80. He earns £ 21,000, which covers his monthly expenses.

Jason Hollands Managing director of stockbroker Bestinvest

Because of his home improvements plans, it makes sense for him to be skewed towards savings rather than riskier long-term investments.

Currently, 87pc of his savings and investments are held in liquid assets in the form of Premium Bonds and fixedrate savings bonds, with just 13pc in equity investments. Premium Bonds make up the biggest proportion, at 63pc. These give bond holders a chance to win tax- free prizes of anywhere between £25 to £1m in a monthly draw.

The average return based on prize money is equivalent to 4.65pc, but the median return will be lower than this as a lot of bond holders need to win absolutely nothing each month for every lucky person who hits the £1m jackpot.

Better average returns can be made elsewhere, albeit without the one-in50m chance of winning £1m.

If Mr Wilson is not fully utilising his £20,000 Isa allowance, he might consider shifting some of his Premium Bond savings into a cash Isa where the most competitive easy-access rates are paying 4.7pc upwards, and fixed rates of over 5pc can be found. Within an Isa all interest is tax- free, matching the tax benefit of Premium Bonds.

His investments are held in two UK equity funds within an Isa: the CT UK Equity Income and Fidelity Special Situations funds. The latter is a fund we like and is managed by Alex Wright, a contrarian investor who seeks out unloved companies on low valuations, but with recovery potential. This approach requires patience but has worked well over the long term, and the current environment where UK shares have been out of favour is likely to be throwing up lots of opportunities for the manager. The CT UK Equity Income fund is one we strongly backed in the past and had a strong track record, but earlier this year saw its longstanding manager Richard Colwell retire and so Mr Wilson should consider alternatives.

My main observation is that Mr Wilson is too narrowly focused on the UK equity market and should diversify.

While there are good opportunities investing in UK shares, the market represents just 3.7pc of global equities (as measured by the MSCI AC World Index), and so it is wise to cast a much wider net. Instead, he should consider switching a significant chunk of his equity exposure into funds that take a global approach. Funds to consider include GuardCap Global Equity, Brown Advisory Global Leaders or Evenlode Global Income. These are all actively managed funds, but another option is to invest via a low- cost tracker fund such as the Fidelity Index World fund.

Lisa Caplan Director of Onestep Financial Planning at Charles Stanley

Mr Wilson is in a relatively good financial position. He owns his home outright and, once he starts getting the state pension, will have enough income to cover his regular expenditure.

Taking all his pensions together, he will receive just short of £22,000, from £860 per month from his first pension, £80 a month from his NHS pension and state pension of £10,600 per year. All his pensions are index-linked to keep up with inflation.

If he has not already done so, he should check his state pension entitlement, and if he is short of the 35 years’ worth of National Insurance Contributions he will usually need, he can look at buying extra years. This is usually a very good investment that pays back within about four years.

On paper, his projected income of £11,280 without the state pension will meet his basic living costs, but will not be enough for what the Pensions and Lifetime Savings Association and Loughborough University estimate you need to spend to live a very basic retirement (£12,800). This is after income tax.

As he will no longer be working, we can assume Mr Wilson won’t need as much of an emergency fund. However, if he has any big spending plans in the first five years of his retirement, I recommend putting the money for that in high interest savings accounts split between easy-access, notice and fixedterm deposits to match his spending plans. His existing cash savings might be enough, but he needs to balance returns with access once he stops work.

Presumably, the sale of his house will cover the cost of buying his next flat. As his lifestyle will change, it makes sense to see how his spending evolves. But he does not have a great deal spare.

As he believes he will start using his savings in the next few years, and does not like risk, it makes sense to look to cash. However, he will not have the opportunity to benefit from potential growth from shares. I would suggest that he looks at getting a better return from cash products as there are at last reasonable interest rates to be had. If he is willing to tie up money for one or two years, he can get over 5pc interest.

He says he does not like taking risk at his age, but is taking investment risk. He has more than 12pc of his savings and investments capital in primarily UK shares. These are relatively higher risk, which come with being invested in shares. If he wants to reduce risk he’s taking, he could look at diversifying into other asset classes, such as bonds and other geographical areas. There are funds which can provide this.

He is taking a different type of risk with his large holding of Premium Bonds – inflation risk. The prize pot for Premium Bonds is inflation linked, but bond value remains fixed in relative terms. A win on the Premium Bonds is always welcome and has the advantage of being tax- free, but he may not get any return. He could consider moving some of that cash to a deposit account that pays a high interest rate, or even look at increasing the amount he has invested.

As a basic- rate taxpayer he has a savings allowance of £1,000 of interest on which he pays no income tax. Assuming a 5pc interest rate, he would get that from £20,000 in savings. This makes Isas more attractive. He can shelter £20,000 a year.

If he wants to take no risk at all, he could buy a fixed- term annuity. He would lose the flexibility that his cash provides, so I am not sure this is the right route for him.

Money

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2023-11-18T08:00:00.0000000Z

2023-11-18T08:00:00.0000000Z

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