Creating a regular income from savings

Pugliese

Hi

I have never been a saver, so have very little knowledge of how the whole system works but I am about to be given £300k+ and wanted to know the best way of creating a monthly income, so I don't have to work so hard in future.

I have a wife, so we can split the money if that is advantageous, other than that, I will probably spend £50k within the next year improving the house. We have no other debts or mortgage and are basic rate tax payers.

Any suggestions would be much appreciated.

Thanks

Jake'sGran

There are banks and building societies offering monthly payments. At the top of this section, if you click Banking/Saving you may find that Martin has listed accounts paying monthly interest. If not, you will need to check the best paying accounts to see which ones pay monthly interest. You could look at comparison sites like Moneysupermarket.com. I think Nationwide do a monthly income. The best paying accounts have a fixed term; your money is tied up for a period of time, 1 - 5 years.

To protect you money in the event of any bank crashes (very unlikely according to some who post on here) you must not put more than £50k in one account although I'm sure I have read that this has been increased.

You will probably get just under 3% on an instant access a/c. As you are a tax payer, if you have not already used your ISA allowance this year, you should use it now.

Finally, there are funds which pay out monthly income. Have a look at Fidelity (excellent company) and M&G. Also look at Invesco Perpetual.

dunstonh

Taking an income from savings can actually be quite high risk. You may not have investment risk but you are replacing that with shortfall risk, provider risk and inflation risk. For example, if you draw all the interest as income, then the £300k will be worth around £195,000 in 10 years time in real terms. The interest it pays will be lower in real terms a well. So, you then may need to start drawing capital as well which just further speeds up the erosion until you end up with nothing. Now, if you want to use this money for 10-20-30 years then you are risking it being eroded away into nothing even though you thought it was no risk.

With income, there is no risk free option.

You need to look at your objectives, timescales, ascertain your risk profile and then decide how to invest and save to meet your investment risk profile and objectives. You may be basic rate taxpayers without the £300k, but its possible tax will become an issue with the £300k. That will largely depend on how you set things up.

It is impossible for anyone to suggest anything based on the little criteria you have given. Or at least anything suggested would be pointless as it could be right but could be wrong.

Pugliese

Thanks for the advice guys. I think an IFA is the correct route as I potentialy only need a bit of extra income for a year and a half, as I can take my pension early but it may make sense to defer that and live off the interest on the capital.

jamesd

You definitely need to learn more about the investment options. You should be able to get £12,500 or so a year of extra income, increasing with inflation, for the rest of your life, from the £250,000 using a range of bond funds and equity income funds. That's assuming 5%+ inflation return, not that hard to achieve. More cautiously you could take 4% and the capital value would probably grow over time. The capital value would fluctuate up and down by perhaps 20% a year but that's both up and down, not all down, it's just normal market variations. This variation can be controlled by varying the mixture of investments, but the lower the variation, the lower the total investment return will be.

Keeping a year's worth of income in a savings account with instant access is how you smooth out the income, which would be paid usually twice a year, though there are some monthly payment options as well. You'd set up a monthly standing order from the savings account to your normal bank account and arrange for the income to go into the savings account whenever it's paid out.

Using the full £10,200 S&S ISA allowance every year for both of you to gradually move the money into a place where the income is pad tax free is pretty much routine.

Making pension contributions up to 100% of your income from employment then taking an income from the pension once you're 55 (if you aren't already) may also be useful. Same for your wife, up to her income or £3600 if she's not working. It's usually beneficial to share the planning because you each get close to £10,000 of income tax free because of your personal allowance when you're 65. Possibly sooner if the government changes the limit for everyone. So it's often a good idea to try to ensure you get that much taxable pension so you get full benefit from the tax relief.

This may not be right for you but it's a pretty standard approach to take. It's the sort of thing that other options must be compared to so you know if or why they are delivering some extra benefit.

unbiased.co.uk is the place to go to find a local IFA. Visit several, just as you'd get quotes from several builders. Much of it is a matter of opinion but there should be at least some consistency in what they suggest as likely to be good options.

Cautious_Investor_3

Quick question, how old are you?

The Cautious Investor

Pugliese

Cautious_Investor wrote: »

Quick question, how old are you?

The Cautious Investor

55 in April

Cautious_Investor_3

Pugliese wrote: »

55 in April

Ok thanks.

Just a thought not mentioned I don't think by the others, but consider the benefits of a PLA (Purchased Life Annuity).

It can be a low risk and tax efficient way of providing an income, you do however give up access to your capital.

More information can be found here:

http://www.!!!!!!.uk/technical-area/retirement/a-guaranteed-annuity-with-less-tax-to-pay/

As with any financial products there are pros and cons but I have seen them work well in the past.

Probably worth mentioning to whoever you take advice off, remember to look at www.unbiased.co.uk to help you find a suitable IFA.

I hope this helps.

The Cautious Investor

robmil29

As with any investing, diversify. As far as income goes, look into safe government bonds, or investment grade corporate bonds. It wouldn't be a bad idea to take a percentage of that and put it into safe company offering preferred shares.

Pugliese

Thanks for all the advice. As suggested I will now book initial interviews with a couple of IFA's and go from there.

Loughton_Monkey

Whatever you do, it is important to understand that the mix between "Income" and "Capital Growth" is rather complicated or blurred.

If you want an income that is guaranteed then there are few options. First you can 'save' in a bank savings account (easy access, fixed term etc.) and that will provide a fixed income provided you pick a monthly interest flavour. The only other way is to buy an annuity, but then you will never see your capital again, and is probably not what you want.

So that leads to 'investments'. Here we are normally talking of shares or funds. There is a legal definition between capital gains and income, but neither are predictable or guaranteed. Taking a highly theoretical example, you could invest £100K in a bag of shares known to pay high dividends. Imagine the dividends averaged 8% and the share price remained unaltered over the year. Then you would have received an irregular £8,000, subject to basic rate tax. I, on the other hand, could put £100K in a bag of shares known to pay either little or no dividend, but are perceived as 'growth stocks'. I would get no income, but might see the capital value rise to £108K. Buy selling £8K worth of shares, I would receive that tax free (because the growth is well within Capital Gains Tax limits).

So, as perverse as it seems, it is better to invest in funds (or shares) that are likely to see capital growth, and then 'dip into' the fund to provide your income.