Ask a planner answers: Big decisions

Monday, May 8, 2017

The question is from Elena, 39.

I currently hold £130k in cash savings, but I am also not in employment right now due to ill-health. I had been keeping my savings in cash for a mortgage deposit, but because of my ill-health my goals have changed and I am now interested in using a proportion of my savings to create an investment pot -with the goal of generating enough passive income to be able to 'buy myself' the ability to work part-time in the future to help manage my condition. I was hoping for advice on whether taking money out of a potential mortgage deposit to create a separate investment pot was a good idea and if yes how much I should allocate to the investment pot - ideally I'd want to generate passive income as quickly as possible. I'd be very grateful for any advice.

Answer from Keri Carter, CFPTM Chartered MCSI, Broadway Financial Planning

I'm sorry to hear that your health has caused you to reconsider your plans. You now find yourself at a crossroads with some big decisions to make. You haven’t provided details of the costs of purchasing a new home or what income is required so I have provided some general guidance only.
Now would be a good time to consider your objectives for the longer term. From the information given, it seems likely that you cannot afford to buy your own home and fund a change of lifestyle. As a starting point, I would suggest you consider the costs associated with renting versus buying your own home before making any further decisions. This should then allow you to make a decision over this fact.

Assuming you decide to rent, you will then need to consider how best to meet your income needs. When investing for income, it's important to establish whether this is for the rest of your lifetime or for a fixed period. Depending on the outcome, will depend on the amount you need to invest. “Income” from investments can be delivered in two ways; capital return via the cancellation of investments or real income delivered via dividends or interest. As a general guide, I would suggest that a typical balanced investor could expect a “return” of approximately 5% per annum after costs over a period of, say, 7-10 years. However, remember that investing will result in a risk to capital and so the return may fluctuate from year to year. You would, however, need to discuss your requirements with a financial planner to determine your attitude to risk and the most appropriate investment strategy.

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Keri Carter, CFPTM Chartered MCSI, Broadway Financial Planning