How would you invest £1,000,000 for income?

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  • Linton
    Linton Posts: 17,066
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    Mr_Dudley wrote: »
    .......
    I see from other sites there are several banks / BS's that offer 5% on fixed term savings with monthly payouts. It would be easy for me to do just that and get £50k without any risk whatsoever.

    My original question was if it's possible to get, say, 6% return without serious risk? I'm always reading about investing in shares and bonds as well as cash but this advice seems to come form companies that have a vested interest in me investing in shareas and bonds!

    ......

    So to go back to the original question is the best thing to do just simply put the money in the bank??

    Thanks - Mr D

    Various points

    1) Dont forget your 5% would be subject to higher rate tax. With care much of the tax on share based investment (which in any case is currently lower than income tax) can be avoided.
    2) You cant do anything with some risk. eg 5% from a bank sounds good but inflation will halve the value of both the income and the capital well within your lifetime. Over the long term the value of shares should increase with inflation.
    3) To answer your final question - No

    For £1M you should definitely be talking to a good IFA.
  • Mr_Dudley
    Mr_Dudley Posts: 17 Forumite
    Linton wrote: »
    Various points

    1) Dont forget your 5% would be subject to higher rate tax. With care much of the tax on share based investment (which in any case is currently lower than income tax) can be avoided.
    2) You cant do anything with some risk. eg 5% from a bank sounds good but inflation will halve the value of both the income and the capital well within your lifetime. Over the long term the value of shares should increase with inflation.
    3) To answer your final question - No

    For £1M you should definitely be talking to a good IFA.

    Thanks Linton

    To answer you:-

    1) There will be 2 of us so 2 x tax free allowance = 20% tax on remainder - we will also be using the holiday let to offset some costs.
    2) Agreed - I probably need a mix
    3) Agreed

    How do I find a good IFA? The wealth managers at the Bank seem to know less than I do!!

    Mr D
  • chucknorris
    chucknorris Posts: 10,785
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    edited 11 May 2011 at 8:34AM
    Mr_Dudley wrote: »
    So our plan is quite simple really. We will sell the house in Surrey which produces around £1m in profit net of costs. We will then move to Devon and live in the house there. We will have around £10k from the holiday let so need £50k from the cash.

    Further to my earlier post we are also in Surrey and may retire to Devon after selling our 8 properties in London and our house in Dorking. We too will have a substantial sum of money to produce an income from, but of course the problem with savings accounts is the capital depreciation.

    Since you already have experience with holiday lets would you not fancy 2 or 3 more? Or would you consider that too much effort in your retirement?
    Chuck Norris can kill two stones with one birdThe only time Chuck Norris was wrong was when he thought he had made a mistakeChuck Norris puts the "laughter" in "manslaughter".I've started running again, after several injuries had forced me to stop
  • Reaper
    Reaper Posts: 7,277
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    Mr_Dudley wrote: »
    How do I find a good IFA? The wealth managers at the Bank seem to know less than I do!!
    The first thing to realise is bank advisors are not IFAs and are best avoided.

    Ideally get a recommendation from a friend who has used an IFA. Failing that have a look for some near you on http://www.unbiased.com/

    The initial meeting ought to be free, so don't be afraid of seeing more than one to find one you are comfortable with who is good at explaining things.

    Also I strongly suggest you ask to work on a fees basis, not commission.
  • Mr_Dudley
    Mr_Dudley Posts: 17 Forumite
    Further to my earlier post we are also in Surrey and may retire to Devon after selling our 8 properties in London and our house in Dorking. We too will have a substantial sum of money to produce an income from, but of course the problem with savings accounts is the capital depreciation.

    Since you already have experience with holiday lets would you not fancy 2 or 3 more? Or would you consider that too much effort in your retirement?

    Hi Chucknorris

    I have worked in property (commercial) for over 20 years.

    I never really "got" the allure of BTL.

    What nobody ever seems to allow for is a sinking fund to pay for a full refurbishment every 10 years or so. A 2 bed flat in London would need new kitchen, bathroom, decoration and floorcoverings every 10 years to keep the rent at decent levels. This would cost around £20k as a minimum I would have thought. That means you need to set aside (in rough terms) £2000 per annum of your income from rent to pay for this so your net return after including and other costs this is well below 4%.

    The only real money to be made from BTL was from capital appreciation. That was the big story of the last 10 years but I don't see that kind of real house price growth over the next 10 years; lack of credit simply won't allow it.

    The issue with holiday lets is you need to keep them looking really good to get the lettings and you have to fully furnish and equip them. Add into that the seasonality of the income and I certainly would not want to rely on that alone for my income.

    It's useful having at least one holiday let as you can offset all sorts of stuff against your income - useful perhaps to subsidise your own lifestyle...

    Another problem with property is that it is inherently illiquid. It has a high cost of entry (stamp, fees etc) and has substantial maintenance issues associated with it.

    Regards Mr D
  • chucknorris
    chucknorris Posts: 10,785
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    Mr_Dudley wrote: »
    Hi Chucknorris

    I have worked in property (commercial) for over 20 years.

    I never really "got" the allure of BTL.

    What nobody ever seems to allow for is a sinking fund to pay for a full refurbishment every 10 years or so. A 2 bed flat in London would need new kitchen, bathroom, decoration and floorcoverings every 10 years to keep the rent at decent levels. This would cost around £20k as a minimum I would have thought. That means you need to set aside (in rough terms) £2000 per annum of your income from rent to pay for this so your net return after including and other costs this is well below 4%.

    The only real money to be made from BTL was from capital appreciation. That was the big story of the last 10 years but I don't see that kind of real house price growth over the next 10 years; lack of credit simply won't allow it.

    The issue with holiday lets is you need to keep them looking really good to get the lettings and you have to fully furnish and equip them. Add into that the seasonality of the income and I certainly would not want to rely on that alone for my income.

    It's useful having at least one holiday let as you can offset all sorts of stuff against your income - useful perhaps to subsidise your own lifestyle...

    Another problem with property is that it is inherently illiquid. It has a high cost of entry (stamp, fees etc) and has substantial maintenance issues associated with it.

    Regards Mr D

    Hi, I'm a chartered surveyor (although I work as a university lecturer these days), we usually refurbish around every 8 years or so but it can stretch to 10, whilst you are correct about the capital growth, the rental growth has been very good too, since I invested 20 years ago)

    Whilst I obviously agree about the fees I like the idea because of the income and capital growth (I only anticipate keeping pace with inflation, I agree with you regarding lack of significant 'real' growth, it's more about avoiding depreciation for me, rather than achieving profit via capital appreciation).
    Chuck Norris can kill two stones with one birdThe only time Chuck Norris was wrong was when he thought he had made a mistakeChuck Norris puts the "laughter" in "manslaughter".I've started running again, after several injuries had forced me to stop
  • gadgetmind
    gadgetmind Posts: 11,130
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    I think you need to speak to an IFA who understands investments and tax. For instance, you should be looking to split the money between you and also (as observed by others) concentrate on dividend income rather than interest income. Assuming you can both remain basic rate tax payers, then dividends are taxed at 10% before you get them and there is nothing more to pay. This will be particularly important when your pensions kick in at 66 as these chew most of your personal allowance.

    Other observations.
    1) Do "Bed and ISA" every year to use your CGT allowances. Reinvest some but also put max into S&S ISAs. Over 20 years, you should be able to get half of your money moved away from HMG's beady eye, which will make tax a lot easier.
    2) Consider continuing to pay into pensions. Even if not earning, you can both put £2880 each into a pension every year, which HMG gross up to £3600 for you. However. pension income is taxable, so you do need to try and model your income situation from 55 to 66 and 66 onwards. This can be done easily with a simple spreadsheet. Put in assumptions for capital growth after fees (I use 6%), annual drawdown (I use 4%), cpi of maybe 3.5% (which erodes the value of your money but also increases personal allowances and and state pension income), and see what the picture looks like.
    3) Over any long period, trying to get greater than about 4% pa from capital will tend to erode it. You're either going to need a larger pot, lesser expectations, or very good luck.

    Because you have 2x personal allowances, and because dividends aren't taxed further, you should be able to get £40k into your pocket, after tax. Have you produced a spreadsheet showing all of your current and projected expenses, and tried dividing them down into those that are fixed, those you can adjust during lean years (don't change car, cheaper holiday, fewer shoes) and those that will disappear when you retire?

    BTW, I can second going to the Motley Fool and looking at the "basket" IT approach and also the "HYP portfolio" approach. Both are hard work, and neither are risk free, but it sounds like you'll have time on your hands.

    Good luck!
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • dunstonh
    dunstonh Posts: 116,044
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    edited 11 May 2011 at 10:03AM
    How do I find a good IFA? The wealth managers at the Bank seem to know less than I do!!

    If they knew what they were doing they wouldnt be at a bank. Banks are generally the training ground for advisers nowadays. You typically end up with either a newbie adviser who hasnt got to grasp with things yet or one that has been there a long time and become brainwashed into thinking their commission based limited options are the best thing going.

    An IFA is a no brainer in this respect and on fee basis as that will be cheaper (fee basis means you get the commission rebated. So fee option nearly always works out cheaper than commission .e.g £1mill at 3% commission + £30,000 commission. Whereas fee basis at £2000 means you get £28,000 commission rebated assuming £2000 is used to pay the fee. If the advice includes pensions then the fee can be collected via the pension which means you effectively get tax relief on that fee as well).

    The term IFA ensures that they have to offer a fee option and be whole of market. However, there are loads of different business models and IFAs will focus on different types of client. e.g. some may focus on the mortgage market more. Others corporate. You also have transactional advisers and servicing advisers. Transactional will give one off advice. They will give you advice now and thats the end of it. Servicing advisers will give ongoing advice. You need to decide which you want (servicing is good for larger amounts invested where portfolio rebalancing and reviews are desirable - for smaller amounts the types of investment used are likely to be different and its not cost effective to have frequent reviews)

    There are some rule changes coming in at the start of 2013 and around 1/3rd of advisers are expected to leave. So, if you want on-going advice make sure you find out if the person you are using is going to be there post 2012.
    For instance, you should be looking to split the money between you and also (as observed by others) concentrate on dividend income rather than interest income. Assuming you can both remain basic rate tax payers, then dividends are taxed at 10% before you get them and there is nothing more to pay. This will be particularly important when your pensions kick in at 66 as these chew most of your personal allowance.

    And using capital withdrawals as well to utilise the annual CGT allowance. With over £10k allowance there each year, you can use capital withdrawals to reduce tax (part of which including the annual bed&ISA and bed&pension transactions). Not all income has to be natural generated (dividends) or interest. You can use some of the growth as income to reduce the tax.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • CLAPTON
    CLAPTON Posts: 41,865
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    Mr_Dudley wrote: »
    Thanks Marine Life

    An interesting thought. Yes we need to allow for inflation. Re the £60k requirement we want to be able to ski once a year and have horses so there are costs involved with that.

    However I'm not so sure about inflation. If you run the numbers, at 4% inflation, £60k becomes enough to buy you a mars bar only in 20 years but from my memory, £40k was a good salary in 1988 and it's still enough to be comfortable on now - or have I gone mad?

    Regards Mr D


    if inflation runs at 4% for 20 years then 60k will only be worth £26,000 in 20 years time

    try living on 26k pa now with your desired lifestyle
  • Mr_Dudley
    Mr_Dudley Posts: 17 Forumite
    Hi, I'm a chartered surveyor (although I work as a university lecturer these days), we usually refurbish around every 8 years or so but it can stretch to 10, whilst you are correct about the capital growth, the rental growth has been very good too, since I invested 20 years ago)

    Whilst I obviously agree about the fees I like the idea because of the income and capital growth (I only anticipate keeping pace with inflation, I agree with you regarding lack of significant 'real' growth, it's more about avoiding depreciation for me, rather than achieving profit via capital appreciation).

    Hi - back to Furnished Holiday Lets. You have to be really careful about what you buy and where. Ideally you want year round interest. Buying one on a surfing beach will a) be seasonal and b) will encourage lots of 20 somethings who may trash the place.

    I have focused on the hiking market. It tends to be older more sensible people and it's just about all year round. Also it's becoming v popular for the newly retired and with the retirement of the baby boom generation this market should grow. As a result we have bought in one of the national parks adjacent to great walking country.

    All the best - Mr D
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