‘I’m 74 and my £400k Isa is yielding £13k a year – should I switch to savings accounts?’

Money Makeover: our reader wants to know how he can maximise his returns over the next five years

Rory Hudson
Rory Hudson, 74, has been watching savings rates shoot up and is wondering whether he should be taking advantage Credit: Stuart Nicol

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Rory Hudson, 74, feels too old to subscribe to the well-trodden adages “invest for the long-term” and “ride out the lows”.

Until now he has – since he started investing his and his wife’s money – taken a 10-year outlook to his returns.

As a result, he’s managed to grow an Isa portfolio to the tune of nearly £400,000.

Over half of it is made up of shares listed in London and North American, while the rest is spread across bonds – largely in the UK, with some overseas – as well as “absolute return”, Asia-Pacific and emerging market funds.

Now, Mr Hudson feels like his strategy needs to change. “I don’t want to invest for that long anymore. I’d be looking at investing for another five years, maximum.”

One fear Mr Hudson has is of damaging his income from his portfolio. Any income an investor draws from their Isa is tax-free.

“I don’t want to lose that benefit. So, I want to know what the best way would be to maximise growth for this portfolio.

“My investments have been creeping back up, but they’re not where they were before the pandemic. So while my income is there, my capital gain is not.”

Mr Hudson estimates that he gets around a 3.5pc yield from his investments. But he has, more recently, been watching savings rates shoot up and is wondering whether he should be taking advantage of these returns.

Savings app Chip offers a 4.51pc interest rate payable monthly on its “instant access” account, while Vanquis Bank is offering a one-year fixed bond at 6.15pc, according to Moneyfacts.

Mr Hudson’s plan is to pass on all his and his wife’s wealth to their son and daughter, split equally.

This would also include their Dundee home, which is a listed property built in the 1760s. He estimates the property value to be around £320,000, which means they will be passing on less than the £1m threshold most couples can pass on to their descendants.

Annually the couple’s pension income (both private and state) is nearly £44,000 while their portfolio generates around £13,000.

With no medical insurance, Mr Hudson and his wife have set aside around £25,000 in cash in case of an emergency.

Emma Deuchars, investment manager at Bestinvest, says:

Mr Hudson is a medium-term investor, who wants a combination of capital growth and income from his portfolio.

Assuming Mr Hudson has a higher-than-medium-level tolerance for risk – this is based on his desire to maximise growth and the high ratio of equity holdings in his portfolio – I would be looking to rebalance holdings towards a growth strategy.

His alternate income streams and sizeable cash buffer suggest this could be suitable. However, if his risk-tolerance is lower, I would be recommending reducing his current equity levels to negate potential volatility over the next five years.

My first suggestion would be that he decrease his holding in “absolute return” funds (£31,000).

Whilst absolute return funds hold an important, defensive role within portfolios (as the name suggests, they look to achieve positive returns in any market), the flip side of this is that the positive return is often lower than other assets during periods of better market growth. Holding over 8pc of his portfolio in these funds will impede Mr Hudson’s goal of gaining back the losses he sustained during the pandemic.

Additionally, I would suggest that the geographic split of his equities be slightly altered. With the economic outlook of the UK remaining difficult, I would recommend that some of these assets be sold to put a greater weighting in his Asia-Pacific and emerging market holdings.

Whilst the post-lockdown rally in China has been slower than expected, there is still scope for growth in the Asia-Pacific region and the same can be said for emerging markets.

With falling energy prices helping to stimulate Europe, I would be allocating a higher proportion of assets to European equities (£12,000).

The existing US equity weighting (£99,000) is already suitable for a growth strategy, as the US rally has potential to widen from its core AI-base and the market is a good source for potential capital growth within portfolios.

Across Mr Hudson’s equity holdings, I would recommend utilising a range of fund styles, such as “growth” (fast-growing companies), “value” (undervalued gems) and passive (tracker funds).

A range of investment strategies within the equity holdings will help to create diversification within this asset class – an important quality given a continued outlook of economic uncertainty.

Opting to use funds over individual shares will also help with the goal of diversification within the portfolio.

The total level of fixed-income assets within the portfolio is suitable for a growth strategy (around 10pc). But I would make sure there is significant exposure to government bonds, which are now largely yielding above expected inflation rates.

And given the current vulnerability of corporate bonds to economic slowdown, I would recommend using short duration bond-exposure where possible (a lower risk choice).

Finally, given the economic uncertainty among markets, I would advise some gold exposure within the portfolio. Whilst it is a non-yielding asset, gold works as a good defensive counterweight to equities as its value does not correlate with the stock market.

Daniel Wood, financial planning director at 7IM, says:

Mr Hudson and his wife are in a position many people find themselves in – wanting to maximise the growth on their investments. The difference within this scenario is the investment time horizon.

Despite Mr Hudson stating he and his wife are too old to invest for another 10 years, and that they are only looking to invest for the next five max, the Office of National Statistics calculates Rory has a life expectancy of 87 and his wife aged 89. Subject to any health-related concerns, both could have a 13-year investment time horizon.

Understanding the investment time horizon, the need for income and the need for capital is very important. This will establish Mr Hudson and his wife’s need to take investment risk, ability to take risk and capacity for loss.

Subsequently, the correct investment strategy and capital growth prospects can be determined.

If Mr and Mrs Hudson have an investment time horizon of five years, they should consider de-risking their portfolio and incorporate a higher portfolio weighting to fixed interest and cash strategies.

Any time horizon under five years is considered short-term. So, I would challenge their ability to take risk, their tolerance to volatility and how this would affect meeting their various needs. These might be income, standard of living and – potentially – future care costs.

De-risking their portfolio and incorporating a higher portfolio weighting to fixed interest and cash strategies would be less risky. Should capital or care needs present themselves, risk-free capital preservation trumps volatile capital growth while offering financial security.

I would question the need to take any investment risk at all. Currently, both could achieve a risk-free 3.8pc rate of interest, via a flexible access cash Isa. Alternatively, 5.7pc, via a one-year fixed cash Isa. Both options would yield a higher level of return compared with the current 3.5pc from the existing investment portfolio.

Under this scenario, Financial Services Compensation Scheme limits should be considered as only £85,000 is covered per savings institution in the event it fails.