‘How can I turn a £6,000 investment into a house deposit for my children?’

Would you like a Telegraph Money Makeover? Apply here or through the form at the bottom of the page

Britain has been in the grip of a housing crisis for years, turning the Bank of Mum and Dad into one of the biggest lenders in the country.

But parents can fast-track their children onto the property ladder, without parting with large chunks of cash in one go.

Savers like Marcus Evans and his wife Emma are stuffing excess cash into Junior Isas and betting the power of stock markets will leave their kids with enough money to one day buy a place of their own.

The 37-year-old financial services professional from Portishead, Somerset, has saved £6,000 into a Junior Isa for his eldest son Alex, 8, and a further £1,400 for his little brother Charlie, 4. Parents can put up to £9,000 a year into the tax-free accounts.
“They will have this money when they turn 18 and it is theirs to use as they wish,” Evans says. “We also put a little bit aside in our own accounts, just in case they end up spending it all. This is to ensure they have a good amount to put towards something worthwhile like a first home.”

Mr Evans is invested in just a few funds, mainly targeting higher-risk emerging markets, as well as ethically-focused funds. These include: WHEB Sustainability, Fidelity Special Situations, Jupiter India and Schroder Asian Discovery.

He does not have a regular savings plan, but contributes on an ad-hoc basis, using excess cash and the boys’ birthday and Christmas money.

We asked the experts to assess whether his strategy is working and how it could be improved.

Hayley North, Chartered Financial Planner, Rose and North

Mr Evans has chosen a concentrated range of investment funds with both an emerging market and sustainable flavour.

Sadly, these two strategies are often in conflict. India and China for example, despite some progressive approaches in certain areas, are not leading the way in terms of their green credentials, yet they are delivering higher growth than we have seen in developed markets of late.

There is still a trade-off right now between investing ethically and achieving the highest possible returns. It is worth noting that the best stock performers of 2022 included companies heavily invested in fossil fuels and military defence.

When investing there are a number of things to consider. The risk you are prepared to take – which is normally assessed as how volatile the performance of a fund is – and any ethical criteria you want to apply, as well as the actual performance of the fund.

As it stands, the funds that Mr Evans has chosen are quite diverse. This is good, but they do also only represent a few areas of the investment market which limits potential growth opportunities. Overall the portfolio has performed well recently, but is taking more risk than it needs to and some of the funds such as Jupiter India and Schroder Asian Discovery, for example, have underperformed over the long term.

It is a difficult time to assess funds right now as markets are under so many external pressures, but it remains important to choose a range of geographies and not ignore the larger developed markets and to ideally have a larger spread of funds.

This mitigates the risk of one fund significantly underperforming and dragging overall performance down. If Mr Evans wants to invest purely ethically, he needs to lose Fidelity Special Situations (this contains tobacco giant Imperial Brands) and Jupiter India (which is heavily invested in petroleum), as these investments sit uncomfortably next to the more ethically-minded WHEB Sustainability.

He could add a fund such as Stewart Investors Asia Pacific and Japan Sustainability instead.

Andy Butcher, Chartered financial planner, Raymond James

I would recommend setting up a regular savings plan. With a diversified portfolio, he can reasonably expect returns of around 7pc a year over the long term. If Mr Evans made contributions of £100 a month to his boys’ pots they could both be worth around £30,000 by the time they turn 18.

Mr Evans has a preference for emerging markets and sustainable investments. Currently Mr Evans is invested 100pc in shares and has money in a British fund, a global ethical fund, an Asian fund and an Indian fund.

In terms of investment style he has money in funds which invest in established companies seen as undervalued by the wider market, known as “value” funds, and those which target growing companies, known as “growth” funds. This feels like a reasonable mix given the preference for emerging markets and sustainability.

However, on a three- and five-year basis all of the funds Mr Evans owns have underperformed their benchmarks. This does not automatically mean they should be sold and some have had some more recent strong performance.But he needs to understand why this has been the case and if it is likely to persist.

Given the high fees on some of these, we should be seeing better performance. The Jupiter, Schroders and WHEB funds have done particularly poorly. Possible alternatives include Fidelity Asian Smaller Companies, Janus Henderson Global Sustainable and FSSA Global Emerging Markets Focus.

Would you like a Telegraph Money Makeover? Here’s how to apply.

/////

It is easy to imagine that a windfall inheritance will solve all of life’s problems. But in reality, without sufficient planning and investing, there is only so far a one-off lump sum will stretch.

Anna Black, 58, and her husband James, 53, have long dreamed of paying off their outstanding £189,000 mortgage on their home in Bedford and buying a new property in the Yorkshire countryside.

This dream is about to become a reality because of Mrs Black’s £800,000 inheritance from her parents, which will enable the couple to pay off the mortgage, as well as £30,000 in credit card debt, then sell the house and move on to greener pastures.

But the couple are reluctant to sink all their money into property – as they also want to travel the world and are prepared to spend £15,000 to £20,000 a year. Jordan, Iran and Scandinavia are on Mrs Black's bucket list.

Mrs Black earns about £20,000 a year working in a plant nursery and has a small pension pot worth £20,000. Mr Black earns £54,000 a year and has a “defined benefit” pension which is expected to generate £30,000 a year when he retires. The couple spend a total of £2,500 per month, which will reduce by £700 once mortgage has been paid off. They have no other savings – “the children’s school fees ate those up”, Mrs Black said.

They plan to move in three years’ time and semi-retire aged 60. They expect to sell their home for about £500,000 and would not want to spend more than that on the next place. After that Mrs Black hopes to earn £12,000 a year part-time, and Mr Black between £20,000 and £25,000. Mrs Black said: “So the question is, once all our debts are paid, how do we grow what’s left over?”

Andy Butcher, Chartered Financial Planner at wealth manager Raymond James

Mr and Mrs Black note that the mortgage will be paid off when they move, but they should check any early repayment penalties and look to pay this off early when the inheritance is received. Assuming the Bank Rate is at 4.5pc, any investments would need to return at least 4.5pc after taxes to justify investing their inheritance and not paying the mortgage off. Given this is far from guaranteed, early repayment looks favourable if there are no penalties.

If the funds remaining from the inheritance are left in cash, earning say 1.5pc per year, the maximum Mr and Mrs Black could spend annually through to age 90 would be around £40,000, increasing with inflation. While they should have just enough funds to spend £20,000 to travel as desired, it gives them very little leeway, and certainly no room for any one-off expenses that will inevitably occur. If they live past age 90, they will have likely depleted their funds.

If we assume the remaining inheritance is invested and returns 4pc per year, the annual expenditure can increase to £50,000 a year to age 90 (again increasing with inflation and taking taxes into consideration), meeting their objectives with some additional capacity. This doesn’t however take into consideration care costs, which could quickly erode any savings.

Mr Black may want to consider deferring his pension if the rates are attractive, and especially if he continues to earn money at age 60. It may be more tax-efficient to defer drawing the pension until his income reduces significantly to both avoid the higher rate of income tax and also benefit from an increased deferred pension.

He should also explore the lump sum option of the pension. While a guaranteed income is extremely valuable, he may benefit from drawing the tax-free lump sum in exchange for a reduced annual taxable pension, depending on the commutation rates on offer.

In terms of investing the money, they need to be aware that to generate the required return, they will likely have to take some risk, so returns won’t be in a straight line.

They shouldn’t need to take excessive risk so a balanced, well diversified medium risk multi-asset portfolio should meet their objectives, providing they have the risk tolerance for such a portfolio.

In addition to having a mix across different asset classes we’d look to diversify geographically and by styles within sectors. For example, American shares were the stand out performer for the last few years, specifically high growth stocks in the tech sector. Then last year, these stocks fell significantly, while UK stocks, which have underperformed for five years or so, performed well.

If they are building a portfolio themselves it’s important to not just buy funds or companies based on how they have done in the past. When the market shifts, it’s often the best performing assets that then subsequently underperform.

They should have one eye on the potential downside of any investments, as a loss of over 25pc would seriously impact the longevity of their plan given the level of withdrawals they will be taking to fund their expenditure.

Tom De Burgh Williams, Chartered Financial Planner at wealth manager Charles Stanley

Once Mr and Mrs Black receive the inheritance, they will have £581,000 left after clearing all debts. Also assuming the sale of their current house and purchase of the new house in Yorkshire, they will have a portfolio of £550,000 to invest (including Anna’s small pension fund) for the long term to provide top up income. This does not include growth from inheritance to moving to Yorkshire.

In retirement they will have the husband’s final salary pension of £30,000 as well as their additional income from part-time work. It’s not clear how long this additional income would continue for, but at retirement it would provide the majority of their normal expenditure. Then at age 67 they would both receive full state pensions, currently £10,600 per year.

Therefore, the investment portfolio will realistically need to provide the additional £15,000 to £20,000 per annum required for travel.

We would usually use cash flow analysis to look at the required investment growth and demonstrate affordability in retirement, but if we assume an investment portfolio of £550,000 achieving a growth rate of 4pc per annum, then they should be able to fund the additional “travel income” from the portfolio without seeing a drop in the underlying capital.

With regards to investment, I would initially suggest they retained a proportion (say £100,000) to cover any unexpected costs in the potential move to Yorkshire with the remaining funds put into an investment portfolio. Any surplus, over and above “rainy day funds” can be added to the portfolio after the move.

The new portfolio would be an opportunity to utilise their Isa allowances (£20,000 each per year), with the remaining funds best invested in Mrs Black’s name given her lower tax status. Each year we would then look to move assets across to the Isas to ensure these tax free allowances are utilised.

With changes to capital gains tax coming into force, utilising an insurance bond is one route to consider but initially a simple Isa or general investment account structure would seem appropriate.

A final planning point to consider is when Anna retires, she will be a non-taxpayer up until state pension age. She would therefore be able to draw the funds from the small pension she has in full over two tax years without incurring a tax liability. This could either be used to provide the income needed in those years or to be added into the main portfolio.

Would you like a Telegraph Money Makeover? Here’s how to apply.