Want monthly income from £20k lump sum

jamesd

He's used an endowment so he's presumably comfortable with some investment risk. That means that my first thoughts are that he should look to use both this and next years stocks and shares ISA allowances to put most of the money into investments in those that pay out income tax free.The sort of funds that might be used and their yields include:

9.6% Marlborough High Yield Fixed Interest
7.9% Newton Global High Yield Bond
7.2% Newton Higher Income
6.6% Invesco Perpetual Monthly Income Plus (pays monthly)
6.2% Invesco Perpetual Distribution (pays monthly)
3.9% Invesco Perpetual Income

Those yields are historic and not guaranteed. The capital value varies, by as much as 40% in some of them. He'd use many different funds, not just one. No income tax to pay on any of those inside the ISA. The capital is available at any time with no more than a week or two's delay to sell and get the money.

To be fairly prudent he might recon on taking about 6% income from those per year without expecting the capital value to fall by much long term. That's £1,200 a year or £100 a month.

To smooth out the income he might set up a savings account and put £1200 in it and have the ISA pay the income into that savings account. Also set up a standing order from it to pay £100 a month into his normal bank account as the money he can spend. Once a year he can adjust the spending rate depending on whether the savings account balance is higher or lower than £1,200. Having a full year of planned spending in the savings account means that it would be many years before it actually ran out of money even if the investments had a long run of low payout years and he didn't change the spending rate at all.

Since the purpose here is income and he has other money set aside I think that this sort of thing should do the job decently well for bumping up his income. He does need to be aware about the level of the up and down movements that the individual funds might see since I've mentioned funds for high income more than stable capital values. But I have tried to use funds that long term won't drop too greatly or too quickly in value, so I don't think that there's any realistic chance that the money might run out and stop paying before he dies.

If he wants higher income with higher chance of the capital value dropping he could take 8% a year, £1,600 a year or £133 a month. This would probably drain the capital on a long term average rate of about £400 a year and he's still likely to be dead long before his capital runs out. Which is OK if his purpose is to boost income rather than preserve an inheritance value or capital for possible long term care needs.

Given his age and if income is his main desire then I suggest that he goes with 8%, £133 a month.

If he has no wish at all to preserve the capital and is willing to lose all of it from his estate then he can look at visiting an IFA to buy an annuity. That may well pay out more than 8% at his age and the income would be guaranteed for as long as he lives. Less inheritance - none - but more certainty and maybe higher income level. One drawback is that the capital wouldn't be available to fund care needs.