Cash Clinic: Protecting your nest egg's buying power may be risky business

Q I REACH pensionable age soon and I am arranging to claim my state and private pensions. My wife receives a small state pension. Our home is mortgage-free and worth abut £350,000 and we have no debt. Our children are financially secure and require no support, so we should manage adequately on our joint retirement income.

We will have about 60,000 in "spare" cash – relatively, not a huge amount but saved with great caution – and would welcome your advice on how it could be best invested.

We are extremely risk-averse and I am not especially interested in growth, but I would like to have an investment that provides a safe, regular income with access to the money if necessary, although this probably would not be too often.

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If any of your savings/investment recommendations could be taxed at source, this would be appreciated. Are we living in cloud cuckoo land?

IB, Peeblesshire


TO ENJOY a long and happy retirement, you will need to plan for the longer term. Inflation, while relatively benign at present, is always a long-term danger to fixed incomes. Your state pensions offer inflation-proofing, but if you have not elected for inflation-proofing through your private pension, then the purchasing power will diminish over time. This could force you to draw from your capital to augment income, the compounding effect being an ever-reducing savings pot.

How best to deal with the money you have saved depends on your attitude to investment risk. There is a trade-off between investment risk and potential returns and a risk-averse investor would not normally tolerate any risk to investment capital. Most people seeking a regular income and wanting access to the capital would invest in cash. You could each deposit 5,100 per tax year in a cash individual savings account (Isa) and receive interest tax-free. Cash Isas operate like normal bank accounts and offer a range of options, such as fixed-term rates or instant access.

Your potential need for access precludes placing all of the cash available on a term deposit or investing fully in a fixed income bond. However, interest rates can be higher if you are prepared to lock in to a fixed-term deal, so you could consider this for a portion of your money, leaving the balance on instant access.

You should, however, be aware that interest rates for savers are at historic lows and that, at some point, they will rise. Anyone locking in to a fixed rate must be comfortable that they may be left behind when instant access interest rates improve. Based on your circumstances, it may be prudent to consider a maximum of a one- or two-year term.

Most banks offer a range of products taxed at source and there are tax-free variants available through National Savings & Investments.

Unless the interest rate earned exceeds inflation, it is unlikely investing in cash will increase the buying power of your capital. Indeed, if interest is always drawn, the value of the capital will be eroded by inflation.

It would be possible to invest cautiously with the aim of providing cash plus returns, but this would normally mean that the capital would no longer be guaranteed. This is a risk you may not be willing to take. However, it may be the only prudent way to protect the buying power of your capital longer term.

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Stephen Hall is a financial adviser in the private client and financial services department at HBJ Gateley Wareing.

• If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]

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