‘I have cancer – how should I invest for my children?’

By Dave Baxter

• This reader wants to rebuild his savings after a divorce
• An illness means assets need to either fund retirement or be bequeathed to his children

Parents often want to leave a nest egg for their children with the hope it won’t be needed until long in the future. But illness can strike at any time and accelerate the pace of events.

Kyle, who is 48 and has two sons aged eight and 11, sees himself as in a “double race” to build up his investments due to life’s developments. He got divorced a couple of years ago, which prompted a reset, and a cancer diagnosis last year has since accelerated his timetable.

“Currently I’m saving and investing hard either so I can retire early at 61, or, if I don’t make it, so I have assets to support my two young children (with their mum), and my new partner,” he says. “My aims are to retire as my kids fly the nest (when I turn 61) and if I don’t survive, provide a nest egg that helps my family get through the childhood years.”

Kyle notes that he has therefore switched from an average level of savings to being “quite aggressive”. “I need to maximise my returns given the circumstances, which is a potential tension of concurrent retirement and inheritance needs,” he says.

Kyle does have the means with which to build up a substantial pot, thanks to a yearly income of £105,000. He already receives an Armed Forces pension of £35,000 a year, which starts indexing when he reaches 55. He is also building a civil service defined-benefit pension, which he can take from 58, and will qualify for the full state pension.

He has a £3,000 personal pension invested across Vanguard LifeStrategy 80% Equity (GB00B4PQW151), Vanguard FTSE Developed Europe ex UK Equity Index (GB00B5B71H80) and the Vanguard FTSE Developed Asia Pacific ex Japan ETF (VAPX).

While he is covered on the pensions front, Kyle is somewhat lacking when it comes to Isas. He has nearly £14,000 in cash individual savings accounts (Isas), half of which is his emergency fund and half of which is for his children as they get older.

He does, however, have £23,000 in a stocks-and-shares Isa, invested across a variety of funds, from Vanguard Target Retirement 2040 (GB00BZ6VK781) to Scottish Mortgage (SMT), Alliance Trust (ATST) and Ashoka India Equity (AIE). He pays £240 a month into this pot, with £60 a month into a Trading 212 account used for active investing (marked by * in the table below).

“While I had money in property and sound financial habits I realised I’d been over-reliant on my workplace pensions,” Kyle notes. “They are very generous but don’t have much flexibility or personal control.”

Kyle wants to retire with an income of between £45,000 and £50,000, and if he doesn’t survive, leave as big a pot as possible. “I’m reasonably adventurous given I have a secure job and a good pension,” Kyle says. He does not want to suffer permanent loss of capital but can accept a decent level of volatility, such as a 30 per cent fall. “Given the proximity to retirement or inheritance, I don’t have much time to regain true losses,” he adds.

Kyle favours quality companies, prefers a dividend and “shies away from momentum or trend investments”, instead wanting “steady growth over time rather than obsessing over absolute returns”.

Like many readers, he is currently interested in government bonds, noting: “I’m interested in gilts to provide some certainty of yield and coupon as I near retirement, perhaps in a bond ladder style.” Kyle has a house worth £300,000, with £140,000 left on the mortgage. If he continues his current level of overpayments, this should be settled at around the age of 61.

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS’ CIRCUMSTANCES

Doug Brodie, chief executive at Chancery Lane Income Planners, says:

You have had some significant life-changing events and three main areas require thought. First, if you die tomorrow your kids get the £300,000 house (assuming the mortgage is cleared) plus around £35,000 in cash and assets, along with dependants’ benefits from both defined-benefit pension schemes. If you die at 61 you’ll have the full £300,000 house, plus around £175,000 in accrued cash and assets, plus the dependants and/or death benefits from the pension schemes.

As you’re earning £105,000, for security you’ll need a cash reserve of around nine months’ money, or £50,000. Cash Isa rates are attractive and offer low risk and accessibility, which you may need. You have around £33,500, so you need to accrue a further £17,500 and then not touch it (it’s emergency cash).

You should also confirm what your Forces and Civil Service pensions will pay in terms of dependents’ pension in the event of premature death for your children. Consider redirecting the civil service scheme top-up to your personal pension so it can be passed to the children – and ensure they are the nominated beneficiaries.

Assuming you fully recover, you are already receiving the Armed Forces pension of £35,000 that would be indexed against inflation from the age of 55. Using consumer price index (CPI) inflation of 2.5 per cent, this should pay around £38,633 at the age of 61.

You will then get the state pension at 67 (unless it changes to 68), plus the Civil Service pension, estimated to be £6,000, so around £52,500 gross income. You can choose at the time whether or not to take the tax-free lump sum or commute it for income.

Should you require extra secure income, you could always consider an annuity using your pension pot. With your health history, you’d likely receive an attractive impaired rate. However, you need to balance that pay rate against leaving assets to your kids. An annuity is an irreversible purchase with a 100 per cent loss of capital.

Once the cash reserve is at £50,000 you should start converting the cash Isa to a stocks & shares Isa to generate future tax-free income and gains.

You state that you like “quality companies” and that you shy away from “trend investments” preferring “steady growth over time”. The tough job for DIY investing is sticking to the plan and ignoring distractions. It’s important to truly understand if you are speculating or investing; your objective is to invest for security and income yet you have been dragged into unhelpful speculation.

HydrogenOne Capital Growth (HGEN), which focuses on the potential energy of the future, is still a hugely speculative play in an immature market that cannot yet exist without state subsidies. This is reflected in the trust’s performance: Hydrogen One’s shares have lost 50 per cent over three years, and trade on a hefty discount of 51.5 per cent. 

Scottish Mortgage (SMIT) appeared on every speculator’s dashboard after its spectacular results in 2019. It has a huge three-year volatility of 29.1 and three-year losses of 37.9 per cent. Consider the forever-trust that is F&C (FCIT), with volatility and returns of 14.6 per cent and 24 per cent over the same period.

Finally, if we consider the 2037 gilts (that meet your retirement date), with a 1.75 per cent coupon and a price of £77.40, you’ll receive a running yield of 2.26 per cent – way less than cash in current markets, which is why US-style bond ladders don’t tend to work in the UK. However, there are taxable benefits but considering you have space in your Isa and pensions, this should not worry you.

Matthew Bird, chartered financial planner at Falco Financial Planning, says:

If you haven’t already done so it would be worth checking the death benefits of your pensions. Most defined-benefit pension schemes will pay out to your children while they are still in education should you pass away before they become financially independent. Also make sure you have an up-to-date will and powers of attorney in place, plus expression of wish forms completed for your pensions.

Your goal is to provide £45,000 to £50,000.00 of retirement income from age 61. It looks like you are on course to achieve this from your defined-benefit pensions alone which is positive.

Despite your diagnosis, it might still be possible to arrange term life cover to ensure that your children’s education costs were covered in the event of untimely death, if you were able to arrange the cover you should ensure it is written into trust so that any payout would not form part of your estate thus decreasing the chance of an inheritance tax liability.

The low-cost passive investments in your AJ Bell pension and Isa look broadly sensible given your goal to build a nest egg. The high stock market weightings mean that you will experience large periodic drawdowns but, barring global catastrophe, these should be temporary and over time you should experience growth above the rate of inflation.  

The investments in your Trading212 Isa appear more speculative but are a small part of your holdings overall. 

You mention using gilts/bond ladders to provide certainty of income in retirement. This is a sensible low-risk strategy, but bonds do not keep pace with inflation quite as well as stock dividends, hence there is a trade-off between short to medium term predictability and total returns over the longer term.