This is the latest part in a regular series in which we will provide an investment clinic based on hypothetical scenarios. By doing so we aim to provide some insights which can help different types of investor from beginners all the way up to experienced market participants.

Charlotte is 40 and works as a legal secretary for a firm in Derby. She’s married to Steve, who also has a good job with a car manufacturer, and they own a house together in the western suburb of Mickleover.

They both have a good work pension schemes, which their employers pay into, but they have no savings as such.

Charlotte wants to get her finances in order, but Steve gets bored when she talks about money and is more interested in holidays than saving.

They have 15 years left on their mortgage, which charges interest at 3.5% per year, and after their monthly payment of £1,000 and all their other outgoings they have around £450 left for meals out, the cinema, holidays or potentially to save.

Charlotte is also in the fortunate position of having a portfolio of shares, which was gifted to her grandparents when she was born and is now worth £10,000, but she has no idea about the stock market and doesn’t know what to do with it.

WHAT ARE THE OPTIONS?

The first option that Charlotte and Steve should consider is overpaying their mortgage, assuming their lender doesn’t charge a penalty for doing so. By overpaying, they are shortening the term of the mortgage which means they could be debt-free in less than 15 years.

If they paid £200 of their monthly ‘surplus’ on top of their regular £1,000 payment, they could pay off their mortgage in 12 and a half years, leaving them with an extra £1,000 a month which they could then save or use for holidays.

Charlotte is keen to save, so they could increase their contributions to their workplace pensions, but that money is then ‘locked away’ and can’t be touched until they retire.

Alternatively, they could both open a SIPP or self-invested personal pension and start building up a pot. Although they can’t access the money until they move into retirement, the big benefit of investing in a pension is that for every £100 they contribute the government adds another £25, so they’re effectively getting 25% interest every year on whatever they pay in.

If they each put in say £100 at the start of each month, with the government’s contribution that would be £250 in total, which means £3,000 per year. If they go for an income fund with an annual yield of 5%, within 10 years their ‘pot’ would be worth an impressive £38,980, of which £8,980 would be the benefit of compound interest.

LOOKING FOR INCOME

If Charlotte and Steve kept up their contributions for 20 years, their pot would be an even more impressive £103,186 of which £43,186 would be thanks to compound interest.

The table shows examples of investment trusts yielding 5% or more. One benefit of trusts is they can dip into reserves in leaner periods to help sustain their dividends.

Meanwhile, although Charlotte is just too old to qualify for a lifetime ISA, which offers an upfront government bonus, she could put some money into a normal ISA. The maximum annual contribution to ISAs is £20,000, so £200 a month would be well within the limit. Unfortunately, cash ISAs pay very little in interest, but they do have the benefit of easy access.

However, Charlotte has a portfolio of stocks worth £10,000, which she could transfer into a stocks and shares ISA so that that any capital gains on the holdings would be tax free.

LOW-COST EXPOSURE TO GLOBAL MARKETS

Given that she doesn’t have time to understand what all the different companies in her portfolio do, and she doesn’t want to run the risk that one of them blows up and loses her a lot of money, a stress-free alternative would be to sell some or all of the shares and buy a global exchange traded fund such as the iShares Core MSCI World (SWDA).

The ETF has an annual fee of just 0.2%, which would be just £20 on £10,000, and her money would be ‘in the market’ earning a return.

Plus any income from the basket of stocks in the portfolio, of which there are well over 1,000 will be automatically reinvested.

Researching one or two exchange-traded funds should be more straightforward and less time consuming than lots of individual stocks.

Unless they want to pay off their mortgage early, a combination of regular SIPP contributions and transferring Charlotte’s stock portfolio into an ISA could be a winning combination.

That way they are investing regularly for the future and they still have £250 left over each month to save for a holiday or treats.

DISCLAIMER. This article is based on a fictional situation to provide an example of how someone might approach investing. It is not a personal recommendation. It is important to do your research and understand the risks before investing. 

Where to start

It all begins with sitting down and making a plan together. Charlotte should involve Steve, as they want to share their future together.

Having the resolve to run through the options and do the maths may be a challenge, but all it takes is a couple of rainy Sunday afternoons and they would have the bulk of their plan lined up and ready to go.

Once they have agreed on a way forward, Charlotte and Steve need to stick with it. Setting up direct debits to fund their SIPP investments is the best way to make sure they don’t get diverted from their goals, rather than having to remember to transfer money each month.

If they set up direct debits for the day after they are paid they may not even notice the money going out of their account.

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