Advice requested for income

neilm1m

Hi Everyone, first post so please be gentle.

My mother in law only has a state pension for an income and has decided to sell her house and move somewere closer to my wife and I.
She has a small mortgage of 20K and expects to get approx 250k for the house and then maybe buy a house for a similar or slightly smaller price hence giving herself a small lump sum to supplement her income.
Now I have been mulling this over and have come to the conclusion that she would actually probably be better off, if she were to rent a house, payoff her mortgage, keep 30k in the bank and then invest the rest for income.
This way, even if she just put the money into a savings account she should end up with an income of approx 15-20k per year (less of course the rent).
Can anyone see any major flaws in this and offer advice for suitable investments to produce an income relatively safely?
I had considered suggesting an annuity but I'm fairly sure she won't do that as she wants to keep some money to pass on to her family.
I should have mentioned earlier, she is 65 (I think!).

Thanks in advance for any replies.

dunstonh

ISAs, Investment bonds and Collectives (Unit trusts/OEICs) are the usual suspects in these types of situations. Which is best will depend on personal circumstances.

cheerfulcat

neilm1m wrote:

This way, even if she just put the money into a savings account she should end up with an income of approx 15-20k per year (less of course the rent).
Can anyone see any major flaws in this and offer advice for suitable investments to produce an income relatively safely?

£250,000 in the highest paying savings account would provide a "safe" income of around £10,000 a year after tax. Would that cover her needs?

ReportInvestor

Well renting can reduce some housing costs, but it isn't cheap.

And in the process your m-i-l will be giving some of that money to Gordon Brown - which will help stack the scales against her. How much tax will depend largely on her age and the size of her current state pension.

But I sympathise that running a house off a state pension alone is more or less impossible.

When you take into account the mortgage, the income you are looking at is probably £13,568 = £4,368 basic state pension + £9.2K investment income @ 4% net (cc's figures forgot the mortgage).

Zwicky

The only way to improve her income is to downsize whether she rents or buys.

The problem with renting is that the cost is also going to be around 4% of the value of the property so unless she downsizes all of her interest income is going to go on rental.

You also need to consider the effect of inflation. If she spends all of the interest income on rental her capital sum (and the income she gets from it) will be erroded by inflation. Over say 10 or 20 years this will be very significant.

What would happen if we had another period of substantial house price inflation. If house prices rise by say 30%, her rent is likely to increase by the same % and she will have to pay this out of an income which is being reduced by inflation.

My advice would be to buy but downsize to give her some capital to invest for additional income.

Chrismaths

If she were to rent, then the capital sounds like a candidate for an offshore investment bond. These are basically the same as an onshore investment bond, in that you get the 5% withdrawal allowance (£12,500 pa on £250,000), and top-slicing relief, but the investments in the bond itself are not subject to tax (other than irrecoverable withholding taxes, like those on dividends). The caveat is that if she was to surrender part of all of the bond (and it stood at a gain), if she is a tax payer she'll pay income tax on the gain - but only when she surrenders part of the capital of the bond. That £12,500 would see her right for the next 20 years though.

A decent IFA can usually get terms of 1% charge from the insurance company (which can be spread over 5 or 8 years), plus whatever commission you negotiated with him. As for investments in the bond, that depends entirely on the MIL's circumstances - age, attitude to risk etc. But no doubt some mix of equity, bonds and property.

ReportInvestor

Zwicky wrote:

The only way to improve her income is to downsize whether she rents or buys.

That's very well put.

ktkrunch

I know nothing about the sophisticated ins and outs of money management, and your m.i.l. will have to take advice from a professional. But I do know how bitterly I regret selling my house back in the 1980's. I am in a job which includes accommodation as part of the package, but housing in retirement (I am 60) is a constant worry. I had to sell the house because mortgage rates were then 13% and I was saddled with a tenant who would not pay his rent. I think your m.i.l. should stay in property ownership is she is able to - she could easily have another 25 - 30 years and there is no security like owning your own house.

EdInvestor

Definitely better to buy again as she would then be in a position to generate a further decent topup to her capital and/or income by taking out a lifetime mortgage (equity release) when she is older.

dunstonh

Ed, would you stop telling people to plan to fail. Equity release is not something you should plan for. It is a last resort action.

EdInvestor

I'm really not sure what kind of world you live in DH, where you could describe the most useful new retirement product in a generation as a "last resort" and "planning to fail".

Have you noticed how much of people's wealth is tied up in their property these days?
When you're retired, this is dead money, you know.

Of course I can think of a few heirs who might not see it that way. But frankly, I'm more concerned about retired people having enough money to live comfortably, than seeing them scrimp and deprive themselves so their children can inherit a packet.