Author Topic: Reader case study: Mortgage free UK couple now need investment advice  (Read 6051 times)

jade

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Life Situation:

I am 40 and my husband is 45. We have no dependants. We are based in the UK and paid off our mortgage in April 2015 (house is worth approx. £180k), and are saving over 60% of our joint earnings. We need advice about our next challenge: how best to approach savings/investments/pensions. A rough goal is to be FIRE in 10-15 years.

Gross Salary/Wages:

Approx £33,000 joint income (we are both hourly paid/freelance).

Taxes:


UK basic rate tax payers (20%)

Current monthly expenses:
Water £32
Gas & Elec £56
Council tax £125
RCN & NMC Registration + CRB £29
Charity donation: £6
Mobiles x 2 £16
Diesel £100
house insurance £8
Car insurance £21
Car tax £11
AA breakdown cover £9
MOT & Service / Car dépréciation/ Parts etc £83
TV licence £13
Groceries £300
Gym £65
Other £100 (we usually spend approx £25 a week on clothing, haircuts etc)
Misc £20

Total monthly spend: £994


Assets:
£1000 invested in Ratesetter (2.5-3%)
£6000 in tsb bank (5%)
£16000 in Santander bank (3% till 1.11.16 and then 1.5% so we will need to move a lot of this soon)
£2000 in Kent Reliance (3.25%)

Total assets: £25,000

Specific Question(s):

We are looking for advice about how best to save/invest/ prepare for retirement/ER etc now we have paid our mortgage off as we are close to maxing out the “safer” bank accounts available in the UK with good interest rates. We are fairly risk adverse but keen to ensure our money does match inflation and grow.
 
I am thinking with our fairly low outgoings and savings rate, we might be in the position to be FIRE, if we chose, within 10-15 yrs. As such we would like to make good investing decisions but with fairly good access to the money (I know, maybe asking a lot! :).

I have the opportunity to join my workplace pension on my salary (approx. £24,000) which is 8% contributions on my part and 18% on my employers (though we are a little reticent about handing over the reins and tying this money up till at least 55, I can see with the employer contribution it probably makes sense and can form part of a diverse portfolio as we should have plenty more to invest elsewhere).

We have just started dabbling in peer to peer lending and invested £1000 in Ratesetter (taking advantage of the £100 offer on top).

We are wondering what else to do next as we usually have at least £1000 a month left over. We are thinking about a simple FTSE 100 tracker within an ISA with approx. 60% equities and 40% bonds in time but feel a little nervous as we haven’t done anything with S & S before. We were thinking of maybe opening one soon but just investing small amounts to get started and comfortable.

Also wondering about other options, my husband can contribute 1% and that is matched with one of his employers for a workplace pension. Also, looking into SIPP's.

Your advice is appreciated. Many thanks!
« Last Edit: September 13, 2016, 04:44:00 AM by jade »

cerat0n1a

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #1 on: September 13, 2016, 05:17:33 AM »
Congratulations on paying off the mortgage, and on your high savings rate, particularly on low incomes.

You mention that your salary is £24k and the total is £33k - does that mean that your husband earns £9k (and therefore pays no income tax?) Or did I misunderstand?

First step should definitely to be sign up for those pensions. Although the money is inaccessible until you're 55, that's only 10-15 years away for both of you - in line with your FIRE aspirations. If you contribute 8% and get 18% from the employer (a very generous amount), your money is pretty much being tripled (remember that in addition to the 18%, your contribution comes from pre-tax income, so that for a non- or basic rate taxpayer each £100 you contribute adds £125 to the pension.)

You mention wanting fairly good access to the money - any particular reason why? An index tracker in a stocks and shares ISA would definitely be my recommendation for your £1000 per month, but such an investment has to be viewed as being reasonably long term (i.e. the 10+ years you mention.) You wouldn't want to be forced to sell at a time when the market is down if you really needed instant money. Over a year's expenses in your cash accounts seems like a more than adequate emergency fund. I would also suggest that there is no reason (and no real benefit) to limiting yourself to a UK Index tracker. We are only a part of the world economy after all and it is no more difficult to buy a world tracker, or to select one which tracks US, Europe, Japan/Asia, Emerging Markets etc.

Personally, I would consider investing in shares less risky than Ratesetter; that's not a universally held opinion though.

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #2 on: September 13, 2016, 05:45:00 AM »
Welcome Jade,

1. 8% + 18% employers' match? Grab this with both hands. Now is good.

I'll wait while you fill in the paperwork.

If it helps, don't think of tying this money up until you're 55; think of it as the chunk of your money that you get to spend after 55, but that contributes to your 'stache from now until then. Take it from a Zombie: check out http://www.thefinancezombie.com/2015/11/the-bridge-to-financial-independence.html for more info about balancing the pre and post 55 spending.

2. Getting started with investing.

This will feel a bit scary at first, and that's okay, but you will learn as you go. Unless you have a particular reason for liking the FTSE100, I'd highly recommend Vanguard LifeStrategy 60 for someone in your situation. It is more diversified than the FTSE100, it has your 40% bonds built in and you can set it and forget it.

After you've learnt more you'll probably choose something slightly different, but VLS 60 is a great place to start. Trust me, I'm a random person on the internet.

Choose a low fee S&S ISA from this table http://monevator.com/compare-uk-cheapest-online-brokers/. If you have been saving and thinking about FIRE for a while (which I 'm assuming as you have a paid off house), then think about how much you'll have in there in a couple of years, not just which one is best for your first £1,000. A fixed fee might be best.

If your cash savings represents a comfortable level of emergency funding (considering hourly/freelance wages), I'd leave that as it is (ie move the Santander money to other cash accounts - Moneysavingexpert has the list). So just put your extra £1,000 into an S&S ISA buying VLS 60. If you get more comfortable with investing then maybe divert some of the cash into the ISA as well (I tend to do this in March before the tax year ends).

As much as possible, ignore the value of your ISA. Set up a monthly direct debit and auto investment. Do not read the business news, do not check it more than once a quarter.

3. Saving rate

Is amazing, well done.

4. Other things

Your husband's pension isn't amazing, but is still 1% free money if you delay taking it for a decade (and I think this will increase over the next few years).

I'd hold off on a SIPP for now. The value is less clear cut the less tax you pay. If the access age is still 55 as you and your husband approach 55, consider putting the equivalent of all of your annual earnings in there for a couple of years to get a cheeky government top-up.

Check how much a new customer pays for the same AA cover, and then switch it between you and your husband as new customers instead of renewing (look at topcashback also).

Have you looked at whether the freelancer can claim back tax on professional fees and diesel?

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #3 on: September 13, 2016, 11:00:17 AM »
Congratulations on paying off the mortgage, and on your high savings rate, particularly on low incomes.

You mention that your salary is £24k and the total is £33k - does that mean that your husband earns £9k (and therefore pays no income tax?) Or did I misunderstand?

First step should definitely to be sign up for those pensions. Although the money is inaccessible until you're 55, that's only 10-15 years away for both of you - in line with your FIRE aspirations. If you contribute 8% and get 18% from the employer (a very generous amount), your money is pretty much being tripled (remember that in addition to the 18%, your contribution comes from pre-tax income, so that for a non- or basic rate taxpayer each £100 you contribute adds £125 to the pension.)

You mention wanting fairly good access to the money - any particular reason why? An index tracker in a stocks and shares ISA would definitely be my recommendation for your £1000 per month, but such an investment has to be viewed as being reasonably long term (i.e. the 10+ years you mention.) You wouldn't want to be forced to sell at a time when the market is down if you really needed instant money. Over a year's expenses in your cash accounts seems like a more than adequate emergency fund. I would also suggest that there is no reason (and no real benefit) to limiting yourself to a UK Index tracker. We are only a part of the world economy after all and it is no more difficult to buy a world tracker, or to select one which tracks US, Europe, Japan/Asia, Emerging Markets etc.

Personally, I would consider investing in shares less risky than Ratesetter; that's not a universally held opinion though.

thank you!

yes, you're right about my husband's earnings being under the tax threshold this year so we got a tax rebate tho it can vary each year.

We're happy to look at world and emerging markets, I think we read about the index tracker as a good starting point but in light of your comment and the one below, we're thinking of trying the Vanguard lifestyle 60 instead as that also sounds like it will do the trick.

thanks for the reassurance regarding my pension, I've just signed up and taken an extra 2% (I can contribute 1% more and my employer matches it making my contribution 19% and theirs 9 which is good.

were happy really not to touch the money invested for a good decade or so, I think it's just a mindset shift we need now we're investing. 

ratesetter seems a little more complicated than we initially thought with changing rates depending on loans matched etc but we feel ok with trying 1k for now to see how it pans out but won't be going above that for now.

thanks again for your help :-) much appreciated!

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #4 on: September 13, 2016, 11:16:04 AM »
Great news on the pension.

Are you eligible for the married couples' tax break? I don't know much about it apart from that a lot of eligible people haven't applied.

I found Smarter Investing by Tim Hale an amazingly helpful book for getting started thinking about investing. It helped me understand what the ups and downs in the markets meant, why indexing was awesome and a bit about diversifying.

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #5 on: September 13, 2016, 11:16:37 AM »
Welcome Jade,

1. 8% + 18% employers' match? Grab this with both hands. Now is good.

I'll wait while you fill in the paperwork.

If it helps, don't think of tying this money up until you're 55; think of it as the chunk of your money that you get to spend after 55, but that contributes to your 'stache from now until then. Take it from a Zombie: check out http://www.thefinancezombie.com/2015/11/the-bridge-to-financial-independence.html for more info about balancing the pre and post 55 spending.

2. Getting started with investing.

This will feel a bit scary at first, and that's okay, but you will learn as you go. Unless you have a particular reason for liking the FTSE100, I'd highly recommend Vanguard LifeStrategy 60 for someone in your situation. It is more diversified than the FTSE100, it has your 40% bonds built in and you can set it and forget it.

After you've learnt more you'll probably choose something slightly different, but VLS 60 is a great place to start. Trust me, I'm a random person on the internet.

Choose a low fee S&S ISA from this table http://monevator.com/compare-uk-cheapest-online-brokers/. If you have been saving and thinking about FIRE for a while (which I 'm assuming as you have a paid off house), then think about how much you'll have in there in a couple of years, not just which one is best for your first £1,000. A fixed fee might be best.

If your cash savings represents a comfortable level of emergency funding (considering hourly/freelance wages), I'd leave that as it is (ie move the Santander money to other cash accounts - Moneysavingexpert has the list). So just put your extra £1,000 into an S&S ISA buying VLS 60. If you get more comfortable with investing then maybe divert some of the cash into the ISA as well (I tend to do this in March before the tax year ends).

As much as possible, ignore the value of your ISA. Set up a monthly direct debit and auto investment. Do not read the business news, do not check it more than once a quarter.

3. Saving rate

Is amazing, well done.

4. Other things

Your husband's pension isn't amazing, but is still 1% free money if you delay taking it for a decade (and I think this will increase over the next few years).

I'd hold off on a SIPP for now. The value is less clear cut the less tax you pay. If the access age is still 55 as you and your husband approach 55, consider putting the equivalent of all of your annual earnings in there for a couple of years to get a cheeky government top-up.

Check how much a new customer pays for the same AA cover, and then switch it between you and your husband as new customers instead of renewing (look at topcashback also).

Have you looked at whether the freelancer can claim back tax on professional fees and diesel?

ha! Thanks for the pension encouragement too. all signed up now as mentioned above. It's helped to get this encouragement!

your advice about the VLS60 is appreciated and we will probably go for that. on a logistical note, how and where do we find it? and can we get it in an ISA?  Is that what you meant by choosing a S&S ISA via the monevator link? Do we need to check they do the VLS 60 first? also we may start with £500 a month just to get going, can we change the amounts on these once we feel ready?

my hubby is going to take his pension too and we'll leave the sipp for now then. thanks for the other tips, we negotiate the new AA rate each year and claim diesel / tax where we can.

thanks again! :-)


jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #6 on: September 13, 2016, 11:32:28 AM »
Great news on the pension.

Are you eligible for the married couples' tax break? I don't know much about it apart from that a lot of eligible people haven't applied.

I found Smarter Investing by Tim Hale an amazingly helpful book for getting started thinking about investing. It helped me understand what the ups and downs in the markets meant, why indexing was awesome and a bit about diversifying.

thanks re the pension!

yes, we did the marriage allowance  thing too, very handy.

I read Tim hales book once and have just ordered it again from the library, will be good to gem up on what we're doing.

feeling much better about it all thanks to these responses, cheers!

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #7 on: September 13, 2016, 11:54:35 AM »
Yes, you can buy the VLS 60 in an S&S ISA. The VLS is the investment and the S&S ISA is the 'wrapper' that tells HMRC to keep their hands off it. The Broker/ISA Provider is like the shop that you go to for buying the investment. They hold it on your behalf, and you pay them a small amount to do this.

Look at Charles Stanley Direct, they are good for ISAs under £25k and sell VLS. You can set up a monthly investment for no extra cost and change it whenever you like.

You can buy the VLS 60 as either a fund or an ETF; it is the same thing but you pay for it differently. Funds are often free to buy, and you pay a small % fee for holding them to the broker, they are best when you are making relatively small contributions at a time.

[For ETFs you pay a fixed fee each time you buy, so they are best if you want to spend your annual ISA allowance in one go, you can get brokers where you don't pay a % fee to hold them, just a fixed fee per year (so they are better for bigger portfolios in a few years time).]

You will also need to decide whether to buy income or accumulation units. I think accumulation units will work better for you as they are less work. It means that they roll the dividends up into the value of the fund rather than giving you cash in the account every quarter. You will see a different price for the income and accumulation units but this doesn't mean they are different products.

cerat0n1a

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #8 on: September 13, 2016, 12:45:43 PM »
If stocks and shares ISAs are new to you, it might be worth reading Monevator's comparison

http://monevator.com/find-the-best-online-broker/

and more generally the articles on passive investing in the UK. I think VLS60 is a good choice too.

You might think that it's not worth bothering with the ISA wrapper - you probably won't use up your tax free allowances for either interest (£1000 each per year) or dividends for a few years, but eventually, somewhere down the road, you will have accumulated enough that the forward planning pays off.

Care to share how you're paying < £100 per year house insurance? The £780 per year on Gym membership seems like your only major extravagance.

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #9 on: September 14, 2016, 01:41:36 AM »
Yes, you can buy the VLS 60 in an S&S ISA. The VLS is the investment and the S&S ISA is the 'wrapper' that tells HMRC to keep their hands off it. The Broker/ISA Provider is like the shop that you go to for buying the investment. They hold it on your behalf, and you pay them a small amount to do this.

Look at Charles Stanley Direct, they are good for ISAs under £25k and sell VLS. You can set up a monthly investment for no extra cost and change it whenever you like.

You can buy the VLS 60 as either a fund or an ETF; it is the same thing but you pay for it differently. Funds are often free to buy, and you pay a small % fee for holding them to the broker, they are best when you are making relatively small contributions at a time.

[For ETFs you pay a fixed fee each time you buy, so they are best if you want to spend your annual ISA allowance in one go, you can get brokers where you don't pay a % fee to hold them, just a fixed fee per year (so they are better for bigger portfolios in a few years time).]

You will also need to decide whether to buy income or accumulation units. I think accumulation units will work better for you as they are less work. It means that they roll the dividends up into the value of the fund rather than giving you cash in the account every quarter. You will see a different price for the income and accumulation units but this doesn't mean they are different products.

Perfect, thanks for explaining and that guidance, that's  that's very clear.

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #10 on: September 14, 2016, 01:51:50 AM »
If stocks and shares ISAs are new to you, it might be worth reading Monevator's comparison

http://monevator.com/find-the-best-online-broker/

and more generally the articles on passive investing in the UK. I think VLS60 is a good choice too.

You might think that it's not worth bothering with the ISA wrapper - you probably won't use up your tax free allowances for either interest (£1000 each per year) or dividends for a few years, but eventually, somewhere down the road, you will have accumulated enough that the forward planning pays off.

Care to share how you're paying < £100 per year house insurance? The £780 per year on Gym membership seems like your only major extravagance.

Thanks. Feeling good about the VLS60 now. Good point about the ISA, it's these tips that really help with setting it up, and as you said, worth it in the long run.  House insurance is through legal and general, called "essentials", I think because it's a fairly small 2 bed cottage and we don't have much to insure.


jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #11 on: September 19, 2016, 09:53:58 AM »
Hi again,
 
Could I get a bit more advice on this?

I'm trying to look into different platforms to ensure I get the lowest fee for what we need though finding all the fees a bit confusing. I tried www.comparefundplatforms.co.uk/  and assuming I input the correct info (1 fund, approx 10 years, via ISA, £500 initial investment and £500 a month) Halifax share dealing seems very low at 0.11% and iweb lower at 0.08% though the overall cost impact was £548 for the first (halifax) and £747 for the second (Iweb) which I didn't understand. It seems halifax do vls60 and possibly iweb as they use the halifax platform. Would these be better value than Charles Stanley Direct for our situation or was a fixed fee suggested instead as we should accrue quite quickly? I am wondering if it's a false economy to save money on fees via a % fee and then gave to swap to a fixed fee? Am I missing anything else with the fees?

Also, is there any recommendations for other S & S similar to vls 60 suited to our situation? I.e. new investors wanting low risk, easy to use (only a monthly deposit).

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #12 on: September 19, 2016, 10:46:44 AM »
How many times did you say you were trading per year? Halifax is cheap if you buy all your ISA in one go, but more expensive if you buy a smallish amount every month. Maybe they assumed a regular trading option.

Halifax share dealing sell VLS60 as an ETF, they don't do funds. You can buy the ETF if it works out better for you.

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #13 on: September 19, 2016, 11:28:34 AM »
If I understand correctly we don't want to trade as such, we really want something to invest smallish (to start with) monthly amounts. Low risk, just switch on and leave as we are complete beginners. But we're feeling quite nervous about it if I'm honest, I think not understanding it that well feels tricky when thinking about parting with money.

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #14 on: September 20, 2016, 07:10:38 AM »
Everytime you buy or sell with Halifax that is a 'trade,' ie they will charge you a trading fee of £12.50. That is 2.5% of your £500 (but not a recurring fee). The bigger amounts you invest at a time the cheaper Halifax is.

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #15 on: September 20, 2016, 08:28:11 AM »
Ok, thanks for the clarification, much appreciated. I can see why CS Direct would be better then.


jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #16 on: September 21, 2016, 07:17:38 AM »
Hi again,

Is it best to aim for one fund e.g. vls60 or multiple funds through the same platform?

Thanks again

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #17 on: September 21, 2016, 11:53:36 PM »
Aim for one fund now; get used to the process and the uncertainty. VLS 60 is already diversified. After a while you might want to think about adding some other elements (commercial property, smaller companies, developing countries), but there is no hurry.

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #18 on: September 22, 2016, 02:43:29 AM »
Thanks for your reply and patience answering my questions! It is appreciated. We're trying to understand the ins and outs a bit more before we commit. This article about diversifying your portfolio raised the question we're looking at. www.thisismoney.co.uk/money/diyinvesting/article-2449028/How-funds-hold-investment-portfolio.html Maybe not straight away whilst we're starting putting money into the vls60 but in time should we be considering multiple funds?
« Last Edit: September 22, 2016, 02:49:00 AM by jade »

cerat0n1a

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #19 on: September 22, 2016, 03:01:30 AM »
Or is the vls60 wrapper a slightly different "fund" in that it's already diversified?

It is diversified and is constructed to be the only "fund" you need to hold (the idea is that you can switch between different versions of the life strategy depending on your age/risk profile.) You can think of it as a fund of funds, but with very low costs.

The VLS60 fund holds 60% equity (shares) and 40% fixed income securities (lending money to companies & governments at a fixed %age interest rate.)

If you look just at the 60% share part, it is divided up into holdings in North America (27%), UK (15%),  Europe ex UK (7.6%), Japan (4%) etc. and within each of those it owns index trackers i.e. a small amount in all of the companies listed on the stock exchange, in proportion to their value.

I would consider diversifying further when you have a bigger pot of money  - a few hunded thousand pounds perhaps (I prefer to have multiple pots spread across different platforms simply to mitigate the risk of fraud, internet site disruption, large bank or investment house going bust and having to try to reclaim money through government protection scheme or courts.)

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #20 on: September 22, 2016, 03:12:50 AM »
Or is the vls60 wrapper a slightly different "fund" in that it's already diversified?

It is diversified and is constructed to be the only "fund" you need to hold (the idea is that you can switch between different versions of the life strategy depending on your age/risk profile.) You can think of it as a fund of funds, but with very low costs.

The VLS60 fund holds 60% equity (shares) and 40% fixed income securities (lending money to companies & governments at a fixed %age interest rate.)

If you look just at the 60% share part, it is divided up into holdings in North America (27%), UK (15%),  Europe ex UK (7.6%), Japan (4%) etc. and within each of those it owns index trackers i.e. a small amount in all of the companies listed on the stock exchange, in proportion to their value.

I would consider diversifying further when you have a bigger pot of money  - a few hunded thousand pounds perhaps (I prefer to have multiple pots spread across different platforms simply to mitigate the risk of fraud, internet site disruption, large bank or investment house going bust and having to try to reclaim money through government protection scheme or courts.)

Perfect, thanks! Your last point was part of what we're concerned about but knowing that the vls60 will work for most of what we're planning to save is reassuring. We can learn more and diversify later then. Time to get investing! Thanks!

jade

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Re: Reader case study: Mortgage free UK couple now need investment advice
« Reply #21 on: September 27, 2016, 06:39:54 AM »
All set up with the VLS60 via Charles Stanley Direct.

Thanks so much cerat0n1a and Playing with Fire UK. :)