Question: Our mother is 62 years old and currently has £640k in her bank account. However, she is currently not investing it due to fear of investing. How can we help her overcome this fear, and should we even interfere?
Answer: While your mother has accumulated a decent pot for her retirement, the challenge will be to make it last and to ensure your mother feels comfortable with any decisions aiming to preserve and grow her wealth.
Fear of investing is perfectly rational since it is, at heart, the fear of taking risk and losing her capital. Taking risk is often characterised as a bad thing, or something that only some people should pursue. Yet there are times when taking no risk is the riskiest approach of all.
Traditionally, a bank account deposit is viewed as the safest haven for your money. This may be true as far as fear of losing your money completely is concerned. – even if a bank is robbed, your money is safe. However, you should remember that UK bank deposits are only guaranteed to the sum of £85,000. It’s highly unlikely a major UK bank would go bust, but it’s not beyond precedent in some major economies. A number of high-profile regional banks collapsed in the US this year and Switzerland’s Credit Suisse, an industry titan, also failed before being taken over by its rival UBS.
I wouldn’t worry too much about a scenario like this, but the risk is not zero. Perhaps more pertinent to your situation are the various risks associated with your mother not being invested now. While the initial value of her bank savings should be safely retained if held in cash, the purchasing power of this money will diminish over time due to inflation, even if higher interest rates persist for another year or so.
Furthermore, investing her savings tax-efficiently will help increase the value of these funds, most typically through an ISA or pension (known as tax wrappers) which will facilitate tax-free growth. Your mother is still relatively young at 62, with many years ahead of her, so taking advantage of the tax efficient investing that the government provides is important. For example, she can fund an ISA to the tune of £20,000 a year, and the annual pension allowance has now reached £60,000.
You don’t say if your mother is working or not. If she is, she can boost her pension pot by up to this limit of £60,000 a year or by 100% of her qualifying earnings, whichever is lower. If she is not working now, she can still contribute up to £2,880 a year and the government automatically adds £720 a year for a total of £3,600 a year.
Combine the yearly ISA allowance of £20,000 and a minimum of £23,600 could be held away from the clutches of the tax man every year, and potentially much more if she is still working. If she pays into a pension, the government automatically adds basic rate tax relief of 20% (more could be claimed back if your mother is a higher rate taxpayer).
It’s also important to remember that wealth that is held in a pension is currently exempt from inheritance tax (IHT) should the holder pass away while funds remain in the pension. So beyond its income tax efficiency, a pension can also be a very useful inheritance tax planning tool and is typically the last pot that one wants to draw from if there are other sources of income. ISAs, for example, are tax free to draw from but will count towards IHT if left within an estate.
Alongside the advantages of the tax wrappers above, the potential for investment growth is also a key reason why your mother should look beyond a bank account for her savings. She may well be drawing on her funds for several decades and therefore it is important that they have a chance to grow from investment performance. We discussed in this column the risk of not being invested at all and the need to take some risk to combat inflation. Now let’s look at the mechanisms that can drive growth.
Long-term returns from stock markets and bonds have historically – and often meaningfully – outperformed the returns from cash in savings accounts. Assets such as gold and other commodities, property and infrastructure can also do well from year to year. Considering stock markets more broadly, you can access the growth potential of companies from around the world, in developed and emerging markets.
Bonds, meanwhile, come in many different flavours ranging from government backed bonds, corporate bonds and through to riskier areas such as high yield. As you can see, the investment universe offers a lot of choice – the trouble is, it is hard to tell in advance what the top performing assets in a given year will be.
This is why we prefer taking a diversified approach, a wide range of investments that aim in symphony to both capture the growth of assets that are doing well and to defend against declines in assets that are having a tougher time. Cash savings have historically been a poor safeguard against inflation, and limits any real opportunity for growth.
This should be a key consideration for your mother: it is not so much about the risk of investing (which does exist), it is about the risk of not being invested well, and all her wealth being concentrated in cash savings.
Your mother also shouldn’t have to worry about the cost and hassle of putting together a portfolio of suitable investments. Many firms, like Netwealth, can invest money on your behalf, at a fair price and with professionals to make the more difficult decisions about how and where to invest, while you retain complete visibility and control over your assets.
The question of interference can be a conundrum and you may wish to refer to our article where we talk about having difficult conversations about money. However, if the outcome is in your mother’s favour, and potentially the next generation’s as well, nudging her to consider investing will hopefully not be viewed as interference at all – and only as a common -sense option where to do nothing would be in nobody’s interest.
This article was published in the I on 30 September, 2023.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions. When investing, your capital is at risk.
The answer here does not represent financial advice, nor should it be interpreted as a recommendation to invest.
