Older people generally cannot afford to take the same risks when they invest a windfall but they still want to achieve a healthy return on their cash. Claire Shoesmithexamines some of the available options
A financial windfall is always a welcome thing. But for older people, figuring out how to invest a lump sum can present particular problems.
Whether it's a pension lump sum, money released through the sale of a family home, an inheritance or a payment following a demutualisation like that impending at Irish Nationwide, there are plenty of options out there.
Unfortunately, the range itself can be bewildering and the jargon used to describe many financial products often only adds to the confusion.
Financial advisors can help but many are tied to particular financial institutions and can therefore only recommend a limited range of products - which might not be the best for your particular situation. Too often people come away wondering what they have actually agreed to do with their hard-earned funds.
Add to that the recent stock market turbulence, moderating property price growth and the meagre interest levels being offered by most deposit accounts and it is easy to see how people become even more unsettled.
However, there is no need to panic.
According to John Ellis, managing director of Ellis Financial in Kilkenny, the first thing to do is to ascertain how much money you have in total, how much you need to live off and how much you want to put away. Once that is clear, the next thing is to decide how long you want to put the money away for.
"I would always advise clients to split their investment so that some of it is accessible at short notice and some of it is tied in to a longer-term investment and hence earning more interest," says Ellis.
Tommy Corbett, partner at Carey Corbett Financial Solutions in Dublin, agrees. He advises that an individual looking to invest €100,000 should put away between €20,000 and €30,000 into a short-term deposit account, where they have access to the money should they need to do something as simple as change their car or buy a new kitchen appliance.
The remainder, he believes, should be split between a medium-term investment for three to five years such as a bond with at least some level of capital guarantee (where, even if the investment falls in value, you are guaranteed to receive at least some of your initial capital back at the end of the investment term) and a longer-term product for between five and 10 years.
While the investments you choose will depend on your attitude to risk - the more prepared you are that your investment might lose money, the more chance you have of it increasing in value - by staggering your investments you will have regular access to capital.
It's worth noting that once you have reached retirement age, you are unlikely to be in a position to invest for a long period of time. As a result, putting your money into a higher-risk type of investment could leave you vulnerable if it falls in value as you have less time to reinvest it or allow it to recoup some of its value.
Your risk profile, as this is known, will also depend on your family situation and the state of your health - if you think you may need significant medical care at some point in the near future, it is important to ensure that some of your money is easily accessible. You don't want to find yourself penalised should you need to dip into a longer-term investment early.
As most financial advisors will tell you, diversity and spreading the risk throughout your portfolio is the key.
While it is well-known that, over the long term, equities (stocks and shares) provide higher returns than other types of investment, you could lose out if you are working to a much shorter time horizon.
On the other hand, if you have an adequate regular income, sufficient short-term savings to fund holidays and other larger purchases, there is no point leaving a large amount of money sitting on deposit when you could lock it away for a longer period and have the potential to significantly increase its value.
So, what should you do? While investments will vary from person to person depending on individual circumstances, below are several options as recommended by a series of financial advisors for an individual of varying risk appetites looking to invest €100,000.
POINTS TO CONSIDER
Risk:What level of risk are you comfortable with? Risk is linked to return and generally the more risk with a particular investment, the greater the possible return. Some people are uncomfortable with sudden, short-term fluctuations in the value of their investments; others are more willing to accept short-term fluctuations with the expectation that over the long term returns may be higher.
Return expectation: Investors will generally expect to get the best returns they can for a given level of risk, but it is important to be realistic.
Income:Are you looking for an investment where the gains are contained within the product or one which pays an annual income, such as through dividends?
Time horizon:What length of time do you want to invest for? Whether you have a short, medium or long-term investment horizon will impact the option you choose. Often the investment objective will determine the duration.
Access:What access do you require for your funds?
If you are likely to need to access your funds at little or no notice this will have a significant influence on where you put your money.
Some products are best suited to investors who do not require access to their funds and can afford to leave the money where it is for five years or more.
YOUR INVESTMENT OPTIONS
DEPOSIT ACCOUNTS:For people who are very averse to risk and want to have immediate (or pretty quick) access to their money.
Rabo Direct
Risk profile: Risk averse
Product type:A deposit account offering 5 per cent interest on balances of up to €10,000 in its online on-demand account. A rate of 3.75 per cent is paid for amounts over that level. (Internet access only.)
How it works: You transfer your money into the account and receive interest calculated monthly but paid at the end of the year.
Duration:Any length of time, but if you don't need regular or short-notice access to your funds, you may get higher returns from other investments.
Investment required: Any amount.
GUARANTEED BONDS/FUNDS: These are good investments for someone who has access to sufficient cash on demand elsewhere and is seeking potentially higher returns from a relatively safe investment for part of their lump sum.
Eagle Star's Guaranteed Dynamic 100 Bond Series 2
Comes highly recommended by several brokers, though unfortunately the deadline for applications is today. It is, however, the second in the series and, while it isn't yet set in stone, its popularity means there will likely be a third coming down the line.
Risk profile: Limited risk because it offers 100 per cent capital guarantee on maturity as well as having a protected price equal to 80 per cent of the fund's highest ever unit price.
Product type: a unit-linked single premium bond offering investors exposure to an actively managed equity portfolio.
How it works: This fund offers investors the chance to benefit from rises in stock markets, without being actively involved themselves.
The guarantee provides security that your lump sum is safe, but offers the opportunity for higher levels of growth should stock markets rise.
Duration: Six years. (Can be cashed in early but charges apply.)
Investment required: Minimum €5,000.
IIB Bank's Payout Portfolio
Risk profile
Limited because it offers up to 100 per cent capital guarantee
Product type: A portfolio (comprising 16 stocks over four sectors) of large blue-chip names with market capitalisations ranging from €13 billion to €185 billion.
How it works: This fund offers the potential for a high annual income provided no stock in the fund falls by 40 per cent from its initial level at the start of the investment term.
The secure option offers 8 per cent a year, while the growth option (80 per cent capital security) offers 24 per cent. Investors can divide their fund between both options.
Duration:Three years.
Investment required: minimum €25,000
New Ireland Guaranteed Evergreen Fund
Risk profile: Limited because your capital sum is guaranteed.
Product type: Mixed fund investing in property, equity, fixed interest bonds and cash.
How it works: Gives you both access to Ireland's longest-running managed fund, the Evergreen Fund, and provides security through the capital guarantee. There is a clause whereby all growth of more than 6 per cent is locked in each year.
Duration:Six years.
Investment required: €5,000.
HIGH-YIELD FUND
Hibernian High Yield Equity Fund
Risk profile: Medium
Product type:A portfolio comprising a limited number of stocks - about 40 - with an emphasis on those with large market capitalisations, high yields (income) and good dividend cover operating in stable markets with a history of consistent performance.
How it works:Each of the stocks has an equal weighting, which diversifies the specific stock risk.
As the equities chosen are high yielding, it is ideal for investors who require less volatility and risk than are normally associated with equities but want returns that compare very favourably with equities over time. (Investment is made through Hibernian's Spectrum Bond.)
Duration:Open ended.
Investment required:€10,000.
COMMODITIES:While it is possible to buy into commodities individually, the most popular way of benefiting from the increasing commodity prices is by investing in a commodity fund.
New Ireland's Innovator Fund
Risk profile: Higher risk
Product type:The fund focuses on four key area of alternative energy, water, emerging markets and commodities, but will also put some money into equities to provide a balanced portfolio.
How it works:The fund invests in companies involved in the areas of wind power, solar energy, hydropower, biomass, microturbines and fuel cells. It gives exposure to the fast growing emerging market of India.
Duration:No limit but a period of between five to seven years is recommended. You can withdraw your funds at any time without incurring a penalty.
Investment required:€5,000.
PROPERTY:There are several different options when it comes to investing in property. You can use your lump sum as a deposit to buy a property, rent it out and use the income to pay the mortgage, or invest in property at a distance through a property fund.
While buying your own property gives you more control, you should be sure the rent will cover the mortgage before embarking on such a mission and remember that the property will also need managing, which, if you can't do it yourself, will cost you money.
For someone who wishes to be less hands-on, the best option is to invest in a property fund. These are now being offered by most life financial institutions.
Hibernian European Commercial Property Fund
Risk profile:Higher risk.
Product type:The fund is invested in a broad spread of high quality commercial property holdings, such as offices, factories, shops and restaurants in the European Economic Area, excluding the UK but with the addition of Switzerland.
How it works:This product offers the opportunity to diversify your exposure by investing some of your money in European office, retail and industrial properties that would otherwise be out of bounds for a small retail investor.
The money is invested by Morley Fund Management, the largest property fund manager in Europe, and gains are made as a result of increases in property values and regular rental income. (Investment is made through Hibernian's Spectrum Bond.)
Duration:Open ended.
Investment required:Minimum of €10,000.
Friends First Irish Property Fund
Risk profile: Higher risk
Product type: Diversified commercial property fund with about 45 per cent in office, 43 per cent in retail, 7 per cent in industrial and 5 per cent in cash.
How it works: The fund buys what it believes are high-profile properties in strategic locations and generates a regular income by leasing them out. (Investment is made through Friends First's Prospector fund.)
Duration:Open ended
Investment required:€7,000.
