What income from £400000?

philng

I am 46 & have accumulated around £400000 in cash & shares & have no mortgage. I have done relatively well with the stock market despite a large holding in LTSB shares which I have topped up at 48p & 52p along with the Rights issues (current holding 230000 shares). I am married & have a daughter of 19 at Uni & Son of 14. We both work full time circa annual income approx £70k.
Feel as though life is running away (mid life?) would be good to finish work at 50. My wife is 51. I have a non contrib Final Salary pension of 26 years. What could I realistically expect as a return on £400k? I know there are a number of FTSE100 Shares paying 5%+ e.g shell,Glaxo,Astrazeneca etc.
Feel I need a plan!

soulsaver

You probably should get independent professional advice in your circumstances, but you may get some useful benchmarking advice on here.

getmore4less

I would recomend sites aimed more at investment than personal finance.

www.fool.co.uk is my chosen one there are others.

A good mix of very good ballanced research/planning through to very speculative.

There are few older threads on there about establishing the income requirements and risk and working back from those to estabish safety nets etc.

Will take a while for you to get into it and recognise the good posters.


I think a good starting point is work out in todays money what you think you need as income if you retired today(4 years away is not long so think today).

(I tend to asume the invesment choices will index link and work on returns over that for income calcs.)
eg : At 5% net return you are looking at £20k income from £400k where as you currently have £70k gross income, there is a potential gap that needs bridging if you are spending it all now.

The biggest impact you can make to your future financial security and retirement is spend less now and in the future, also If you can get away with it keep the OH working.

jamesd

Around £24,000 is likely to be reasonably sustainable, growing with inflation, without long term capital loss. That's 6% of capital. If you were using funds you'd be looking at a mixture of high yield bond and other funds. 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. You'd use many different funds, not just one.

For direct holdings to match those you'd need to look at the high yield end of the market and be sure you get enough diversification, which may be difficult given common minimum purchase sizes. Worth looking at some of the PIBS also.

IFAs in general won't be able to advise on shares, though some will have the necessary stock broker qualification to do it.

First part of your plan is to work out what your required and desired income levels are, to give you a minimum and target range. You'll also need to allow at least 20% safety margin on the income portion, how much on capital depends on what you use for income.

I hope that all or almost all of this is in one or more S&S ISA accounts already since you'll want that to get any bond fund or direct bond interest tax free.

philng

That sounds promising. Our current monthly outgoings are around £1200 & therefore we have a large current capacity to save & have been doing so. Monthly current income is around £3800 after deduction of £550 to SAYE schemes & Wifes pension. our main additional Exp is Holidays 3-4 per year & would need to still be able to fund these. No immediate plan to finish work but if I could get an income of £2500pm at 50 with scope to keep pace with inflation without needing to draw my co pension early that would be good. Currently around £160000 is in ISA wrapper & I have been maximising each yrs allowance overe last few yrs in S & S ISA.
Hopeful of LTSB Share Price increase in next 4 yrs & return of some Divs & ability to Save further may get us to £500k.

mike88

And if the worse happens and your investments go belly up you can always trade down housing wise if that is possible or even think of buying a rental property when you judge prices have troughed. As an ex landlord I have had many positive experiences including regular income, capital appreciation and when I sold after 8 years I doubled my money and recouped the initial purchase price from rental income.

jamesd

With the company pension to consider you also lose the need to avoid capital value reduction. The objective can change to getting the same income now and after you take the company pension, even if that means reducing the capital value of your non-pension pot.

Say you can take the work pension at 60, even with no investment growth at all you could have £40,000 a year to spend if you were willing to spend all of your non-pension pot and then live on just the work pension.

Say the work pension was £20k then you'd perhaps want to take £30k a year from now. That would be expected to decrease your non-pension pot by 6k in the first year, more in later years. But it'd still leave you a non-pension pot to top up the work pension to £30k so you would have a level income. I haven't checked what the income level you could take is, just using very rough number to illustrate the principle.

One interesting thing about such calculations is that each year you wait gives you one more year of added pot size and one less year to pay out for until the pension starts, so the acceptable income level can rise quite rapidly. When that happens you can look at increasing pension contributions to maximise the pension tax break. But keeping enough outside to meet your capital needs.

philng

Thanks that is a very informative reply. My current co guaranteed accrued co pension is around £16000pa assumed drawn at age 60 but if i work till 60 it will be around £25000pa. In addition i have pd some extra into pension, current value around £12000 & adding £100pm so i can draw this lump sum instead of from main pension.
So in summary retiring at age 50 maybe possible by drawing an income from investments & topping up shortfall by capital withdrawal until drawing co pension at age 60.
You say a return of 6% is currently feasible, inflation linked without loss of capital?
Would maximising pension contribution each year be a good thing to do?

theGrinch

read as much as you can and self educate yourself - this will take time, but whether you then go on to get advice or not you should have a thorough understanding of what is going on! You could go with an IFA, but most are not independent and the rest know FA.

jamesd

If you wanted to retire on a level income today and reduce capital you could take around £27,500 a year and be left with £201,000 at age 60, enough to top up a £16,000 pension to the same level. That's assuming 6% return. Using a more cautious 4% return you could take £24,500. Assuming you were to draw the pension at 60 with £16,000 value.

Those are a bit too conservative because the 6% value leaves around £300,000 in the non-pension pot when you reach 55. So yes, you could make more pension contributions without running out of non-pension money. You'd need around £250,000 outside the pension to draw it down to nearly zero before you reach age 55. At 4% that's around £270,000.

So it looks as though you could gradually start putting a total of £130,000 in a personal pension to get the tax breaks available for doing it. Mainly the tax free cash plus any higher tax rate earnings you have. But each year you do this for decreases the non-pension pot value that you need so you can put in more.

If you don't mind adjusting things you could start out by putting the total taxable income, after personal allowances, of both of you into pensions, around £55,000 a year after tax relief, perhaps £44,000 before (assuming all basic rate). I wouldn't like to go that high because you need a large safety margin in the non-pension pot. There's also the GAD limit on how much you can take out of a pension pot in drawdwn to consider and at the moment that's less than 6% at age 55 for a man (and lower for a woman) so you'll need to have some money outside the pension to top that up.

You'll also need to consider how keen you are on tying up the 3/4 of the pension pot that you can't take out in the tax free lump sum. At the moment you have no restrictions on the £400,000 so there's some compromise involved.

So yes, it looks as though you could both put your whole taxed income into pension contributions if you wanted to, at least for a while.

You should probably take a look at VCTs as well, though. They generate tax free income and offer 30% tax relief, not 20%, so they may be a better idea for a fair chunk of your basic rate contribution money. This also reduces risk because you can sell after five years and get the capital back without losing the tax relief. But you don't get much control of the investments, they are more similar to funds than shares. Still, ongoing tax free income of about 5% before allowing for the tax relief on the money going in, around 8% after, is worth considering and likely to be paid by some VCTs. VCT tax relief is limited to the tax you paid in the year so you wouldn't put in your whole basic rate income, just around 76% of it to get about 100% of your basic rate tax back from HMRC. No likely chance of making as much as you might make in capital gains from other investments, though.

The main thing to do to reduce the risk is put money in cash to cover two or three years of your anticipated capital drawing so that you can take it without having to sell investments if the market drops. You'd need about £20,000 in savings accounts cover three full years of capital drawing near the start, more towards the end, but the end is less sensitive to variation in the markets.

You could also reduce your income level during market drops.

All calculations here are approximate values to give you some general idea of your position. They aren't guaranteed in any way.