I have spent the last 30 years building up a manufacturing business and at the age of 50 I have decided to sell up and spend more time enjoying life.
I am selling the business for £1.2million after tax and plan to set aside £400,000 for spending over the next decade.
I want to protect the remaining £800,000 as much as possible, while also hopefully seeing it grow by inflation plus a bit.
If you come into a life-changing sum of money and want to spend some and invest the rest, then weighing up your options carefully is important
Both my children have left home, with one currently at university and one just finished, and my wife and I plan to do some travelling around the world for extended trips. I will do some consultancy work in between these to deliver an annual income for us.
I plan to use the £400,000 cash set aside from the sale to supplement this annual income, until I start drawing on my pension in ten years’ time when I turn 60.
My pension pot is currently worth £600,000. We own our home and have paid off the mortgage.
I have previously invested my own money and manage my own pension, but I do not really want to invest the money from the business sale myself. However, I do want to know where it is being invested and why.
What are my options and how could I protect the money but get growth of inflation plus a few per cent?
Simon Lambert, of This is Money, replies: After three decades spent working hard to build up a business, making the decision to sell up and enjoy life in your fifties is understandable – and an enviable position to be in.
If you can continue earning some money flexibly, while supplementing that income from the proceeds of a business sale, then you are well on the road to what many people dream of, working on their own terms.
Wealth Check is This is Money’s new series focusing on those with larger sums of money to manage or invest.
It will look at what people need to consider for lifetime savings and investment pots, inheritances, business sales and other big money life events.
As part of it, we will get professionals to answer your questions.
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The sum of money involved here is a life-changing one for most and should guarantee financial freedom.
What will still require some work, however, is making sure that it lasts the rest of your lifetime, is invested wisely and looked after.
Splitting the pot into two elements makes sense. By setting aside a substantial sum to spend if needed over a decade, it is possible to then invest the rest with a long-term outlook and hopefully keep it growing.
If you do not want to manage the investments yourself a financial adviser or wealth manager could help.
If you could achieve a 5 per cent investment return after fees with £800,000 over ten years, it would grow to £1.32million – more than offsetting the £400,000 allocated for spending from the business sale.
It’s important to note a few things though.
Firstly, that rate of return is by no means guaranteed, furthermore, even if you did achieve it inflation will erode the value of that money, so you wouldn’t really be making more than the £400,000 back.
Finally, at the end of this decade although you plan to access your self-invested pension at the age of 60, you will not be able to draw your state pension until 67.
In this position it is good to be doing thorough research and weighing up your options, but it is also likely to be a wise move seeking professional help from an independent financial adviser.
To find out more about your investment questions, we broke them down into four key areas and got the thoughts of an investment professional and savings expert.
The investing view
Sophie Kilvert, relationship manager at Seven Investment Management
Sophie Kilvert, relationship manager at Seven Investment Management, says: Whilst our clients come from a range of different backgrounds, none of us fit into a neat ‘box’.
We’re all a mass of contradictions, and getting that ‘risk-reward’ balance right is crucial.
Getting the right investment approach agreed is the most important first step towards meeting those all important financial goals, and, as a wealth manager, that’s always our starting point with clients.
Risk vs rewards: what to consider
A lot of our clients want to minimise losses and protect capital – it’s one of our natural instincts as humans.
‘Potential losses are often seen psychologically to be twice as powerful as gains. But choosing the very lowest risk profiles – often tagged as ‘cautious’ or ‘moderately cautious’ – can come at a price, too.
The most cautious risk profile would probably only produce a long term return of around 3 per cent a year after fees – and inflation (as measured by CPI) was at least this level between September 2017 and January 2018 and isn’t much lower now. The next level of risk up would return around 4 per cent (again after fees).
7IM recently researched risk with the London Institute of Banking and Finance. In the survey, some 25 per cent chose the lowest risk option to minimise losses. But when we looked at our own client base, only a handful were in this category.
By far the biggest percentage of our clients (56 per cent) are in the ‘balanced profile’ – two steps up the risk ladder. They recognised (probably through financial advice) that while capital protection was important, they also wanted to balance their need to grow their investments over the long term.
This risk profile should achieve a return between 5 and 6 per cent a year after fees over the long term, although it is worth remembering that there are no guarantees.
Where could you invest for inflation-beating growth
Traditionally, the most cautious of investors would have had a high percentage of bonds (70 per cent plus) in their portfolio – and these would have been good quality ones, i.e. from financially secure governments and companies. But the low interest rate environment has impacted the level of return expected from these too.
So, investors have had to diversify portfolios into the larger stock markets and into other assets – such as alternative investments – to enjoy the returns they need to beat inflation. It’s also why multi-asset funds are popular as you don’t need to be adjusting your own portfolio – a full-time professional does it for you.
Consider slicing up the cash pot
What investors need to realise is that you can slice your investments up. So your needs for the next two-to-three years can sit in a bank account or be invested in cash funds.
The next two-to-three years of income can be invested in a cautious fund as this will help minimise losses.
But money that you will need in six or more years could be invested at the ‘balanced’ level – that is if you are comfortable with it.
It’s also why people invest via investment or wealth managers. Stereotypes pervade about wealth management – it’s assumed that you have to be (very) wealthy, about to retire, have limited time or just not be interested in money. Our experience however is different – our clients come from a variety of backgrounds and want help so they can achieve their financial objectives, using an approach that can be understood.
Some even like to have a flutter in the stock market themselves, whilst ring-fencing the lion’s share of their portfolio with the investment professionals.
Keeping the money safe and getting the best return are the two key things to remember about putting large sums into cash savings
The savings view
Anna Bowes, Savings Champion, says: If you plan to keep £400,000 of the proceeds from your business sale in cash, then there are two key things to be considered, explains Anna Bowes, of Savings Champion: Keeping the money safe and getting the best return.
Money in savings accounts with an authorised bank or building society is protected by the Financial Services Compensation Scheme, up to £85,000 per person, per firm – this doubles up to £170,000 for joint accounts.
However, what many people don’t know about is the temporary high balance protection since 2015, which can cover amounts of up to £1million for up to six months.
Unfortunately, says Anna, this is not available here. She says: ‘Temporary high balance protection is not available on the sale of a business, despite this being just as big a life event as taking your pension or selling a home.
‘While making your decision on what to do with the money it would be good to be able to put it into one provider, but in this case that would leave you exposed.’
For full FSCS protection, you would therefore need to split your £400,000 into accounts with different banks and building societies – and for safety’s sake this should be done straight away.
The next challenge after keeping your money safe is working out a plan to get the best return.
‘A lot of people don’t need access to all of their money, but want a better return on their cash’, says Anna. ‘Having a balanced savings portfolio can be valuable in terms of adding interest.’
She explains that just as we talk about balanced investing portfolios, so we should consider balanced savings portfolios. This means balancing out some instant access savings with notice accounts and fixed rates, perhaps of different durations.
For example, This is Money’s independent savings tables show the top easy access deal pays 1.35 per cent, while the top 180 day notice account pays 1.77 per cent, the top two-year fix pays 2.2 per cent and the top five-year fix pays 2.68 per cent.
One option for someone looking at saving cash they want to spend over ten years is to go for a cascaded approach, says Anna.
‘They could even go one, two, three, four and five,’ she explains. ‘This could either be spent or when the one year matures they could cycle it round. They would get to the point where they have money maturing each year.’
The advantage of this says Anna is that a saver can then avoid putting all their eggs in one basket and have money available to take advantage if interest rates go up, instead of it all being locked away in lower rate long-term accounts.
For those with large sums who want to make sure cash is split sensibly and for the best returns, Savings Champion offers a Concierge Service, where for a 0.15 per cent fee it will create a bespoke savings portfolio.
The information provided by our experts is for the purposes of this article and is not personal financial advice. If you are at all unsure of the suitability of an investment for your circumstances please seek advice.
Nothing in this response constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.