Creating a regular income from savings

cardsharps

jamesd wrote: »

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.

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You pay tax on dividend income within an ISA now though, don't you?

Thrugelmir

cardsharps wrote: »

You pay tax on dividend income within an ISA now though, don't you?

Not on Corporate bonds though , of which there are an increasing number available.

So you earn the income gross and reinvest. A useful compounding investment.

dawyldthing

if it was me i would go for the safe option of putting it in either normal acounts with high interest and then some long term. last Christmas halifax had a 3 year bond at 4.5%, bank of India has a long term. If you can get accounts that gives you 3% then you'll get £7,500, which is a tidy sum really esp when retired as you'll hopefully have less outgoings and your money is safe then.

Cautious_Investor_3

dawyldthing wrote: »

if it was me i would go for the safe option of putting it in either normal acounts with high interest and then some long term. last Christmas halifax had a 3 year bond at 4.5%, bank of India has a long term. If you can get accounts that gives you 3% then you'll get £7,500, which is a tidy sum really esp when retired as you'll hopefully have less outgoings and your money is safe then.

You reduce your capital risk this way but leave yourself open to inflation risk.

CPI is currently 3.2%, lets assume the OP is a 20% tax payer, he or she therefore needs to get 4% to keep pace with inflation. If as you suggest the OP settles for 3% gross he is, in real terms, losing money. He is 55, could live for another 30 or 40 years, as a bare minimum he must get his savings return to keep pace with inflation.

That's before we start talking about the fact that for a 65 year old the actual rate of inflation they suffer is something like twice RPI 9which is 4.5% at the momment from memory.)

For Cash investors beating inflation is key.

The Cautious Investor

pqrdef

Cautious_Investor wrote: »

as a bare minimum he must get his savings return to keep pace with inflation.

But if he reinvests all the income to protect the real value of the capital, the money will never do him any good at all.

Whatever amount of capital one might have to start with, it's probably not a sacred number. Unless one has jamesd's magic recipe for making 5% + RPI every year, it may be perfectly reasonable to contemplate reducing the capital one way or another. You can't take it with you.

Cautious_Investor_3

pqrdef wrote: »

But if he reinvests all the income to protect the real value of the capital, the money will never do him any good at all.

Whatever amount of capital one might have to start with, it's probably not a sacred number. Unless one has jamesd's magic recipe for making 5% + RPI every year, it may be perfectly reasonable to contemplate reducing the capital one way or another. You can't take it with you.

Agreed, you can't take it with you, I just believe that to maintain the buying power you have to get a return equal to at least inflation.

Re 5% + RPI each year (net of tax and charges?) if someone can do that year on year then they might possibly be my god! :rotfl:

The Cautious Investor

jamesd

cardsharps wrote: »

You pay tax on dividend income within an ISA now though, don't you?

Already paid before the company pays out the dividends, so yes, whether it's inside and ISA or not.

But there's a requirement for income here and corporate and government bond funds pay interest on which no tax is deducted, as do funds like Invesco Perpetual Monthly Income Plus that are popular for income. Others like Invesco Perpetual High Income pay a distribution on which tax has been paid.

You'd expect an IFA to consider putting the interest-paying investments into the ISA first, perhaps along with any that are likely to have particularly high capital growth rates (say emerging markets funds) to maximise the ISA benefit.

Then holdings outside any tax wrapper could be sold to make the contributions each year without exceeding the annual CGT allowance (or not by much)) so it'd be quite efficient as a combination.

Even where there's some tax already paid on dividends the record keeping is easier (no need to report deals after you sell four times the annual CGT allowance worth) and you avoid CGT, not an insignificant factor when this much money is involved.

At age 55 soon and with an income requirement I'd look hard at fully using the pension contribution limit, since the 25% lump sum could be taken almost immediately, at age 55, and then the remaining 75% can form the base of the income production.