I could die next year — what should I do with our £300,000?

Times

2 days ago

Q. My wife and I are 87 and, statistically, I am predicted to live to 2030. In the new year we expect to receive approximately £300,000 when a life insurance policy matures, but we are reluctant to put this into the stock market as I may only have five years left, although that could be one year!
Do you have any suggestions as to where and how we might invest this sum, while keeping aside £50,000 in an easy-access account.Alun and Jean
The impossibility of accurately predicting life expectancy is one of the greatest challenges for financial advisers. It is important to ensure that people do not completely run out of money before the end of life, but at the same time it would be a shame not to be able to make the most of any wealth that has been earned and saved. After all, it is important to enjoy what you have worked so hard for.
A key question to consider is what your intention is for the £300,000. Would you like it to generate an income for you? Is it to be kept aside to cover possible future care fees? Would you like to leave it to your beneficiaries?
For the first two objectives, tax efficiency and ease of access will be key concerns. For the third, some might argue that the funds should be invested according to the objectives of your beneficiaries rather than yourselves, or possibly that some of the funds could be gifted to your beneficiaries during your lifetime. It is worth noting that you will need to live for seven years after making a gift for it to fall completely outside your estate for inheritance tax purposes.
As you allude to, it is sensible to take less investment risk when your timeline is short. The value of high-risk asset classes such as shares can be volatile, and it would be a shame to have to sell a portfolio because you need the funds urgently just when there has been a fall in the stock market.
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This is especially pertinent given that global equity markets are close to record highs. The MSCI World index, the American S&P 500 index, the tech-based Nasdaq Composite index, and the UK's FTSE 100 index have all hit record highs this year. You may end up buying at the top of the market only for prices to have fallen when you need to sell. The longer you have to invest, the more chance you tend to have of riding out this volatility.
For those with less time to invest, lower-risk assets such as cash and government bonds are likely to be more suitable. Buying a government bond is a way of lending money to the government in exchange for a fixed annual return.
If you opt to earn interest by saving the money in a cash account, it is advisable not to hold more than £85,000 each with any one bank, as this is the maximum protected by the Financial Services Compensation Scheme (FSCS) if the company fails. National Savings & Investments, the government-backed bank, will protect 100 per cent of your money, however much you save with it, but the interest paid is typically much lower. For example, NS&I's Direct Saver account pays 3.3 per cent interest, whereas many high street banks and building societies pay at about 4.5 per cent. New customers can get 5 per cent for the first 12 months with Chase's easy-access account.
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Holding as much as possible in a joint account is a good idea, as the surviving spouse would still have access if one of you died. Funds held in an individual account are typically frozen on death and cannot be released until probate is granted, which can take many months.
That said, it would still be worth using your annual £20,000 Isa allowances, which would let you collectively transfer £40,000 into a tax-free account each financial year. It is worth ensuring that your Isa can facilitate 'additional permitted subscriptions', which enable the surviving spouse to inherit the tax-free Isa wrapper of the other.
If you are higher or additional-rate taxpayers, short-dated UK government bonds (also known as gilts) can be a tax-efficient alternative to cash, especially if you are a higher or additional-rate taxpayer. Gilts pay interest every six months up until their fixed maturity date, and are typically issued at a price of £1, with the holder getting £1 when they mature. They can be held in joint names if required.
They are tradeable, and can change hands above or below £1 up until they mature. As they are not subject to capital gains tax (which is 24 per cent for higher and additional-rate taxpayers, but 18 per cent for basic-rate payers), it is possible to make a tax-efficient return by buying gilts that are trading below £1. Those with a long time until they mature will normally move around more in price, so it is safer to focus on bonds due to mature within the next two years.
Rachel Winter is a chartered wealth manager and partner in the investment management team at Killik & Co