Want 5% on £300k

dunstonh

Rollerball wrote: »

If he spreads the money sufficiently I'd say it was. Dividends are on the up at the moment, he'll almost certainly get much more than 5% income per year on his initial investment in years to come.

You don't need to pay fund manager's inflated fees to do this, do it yourself and save yourself a small fortune every year.

Still ignoring the risk profile and suggesting something much higher risk than desired.

jamesd

A bit more background. Yield is expressed as an annual rate. If it's paid monthly the monthly payments would each be about yield / 12. They don't have to be even, and it doesn't matter whether they are, because it's prudent to keep a significant cash buffer, at least six months worth of income, better a year.

The yields and dividends are all variable, as is the capital value. Don't expect huge variations in dividend payments but there will be some variation. Your cash buffer is used in part to smooth these out so you only need to adjust your spending or sell some investments once a year.

The tax treatment of the yield depends on which tax wrapper, if any, is involved and whether it's interest or dividends.

In a S&S ISA there is no tax to pay on interest income and that makes investments paying interest the first priority for going into the ISA. Outside an ISA or pension the interest is taxable and like all income it's taxable in a pension as well. The fund details will say whether it's treated as interest or dividend, usually funds with a high bond component will be interest.

For dividends outside a tax wrapper basic rate tax has been deducted and they must be declared for tax purposes if higher rate tax is possible. Within a pension it's just part of the pension income and the total income decides whether any more income tax is due. No more tax is due if held within an ISA.

There's no capital gains tax to pay within an ISA or pension. Outside a tax wrapper you can do the usual trick of selling some investments and buying similar others to realise a capital gain and use your CGT allowance each year to try to prevent a large one from accumulating.

Since income tax rates are higher than CGT rates, for some people who would pay higher rate income tax there's an advantage to getting capital gains instead of income.

Other people need some growth to increase the capital value with inflation so that it keeps the potential to sustain the income in the face of inflation.

Investments also differ in their potential to deliver a higher total return. Those that pay high income levels, particularly bond funds, are not likely to have as high a total return as those that have a greater growth focus. That's in part just because bonds pay out less than shares on average grow. So some growth investing can help to increase the total return and hence hte amount of money that can be taken out, even if it's not paid out automatically but has to be taken by selling some of an investment.

Dividends and interest are paid out automatically, though if you choose the acc(umulation) version of a fund instead of the inc(ome) one they aren't actually paid to you but instead increase the value of the fund. Normally you'd pick the inc version of a fund if you want to take an income, using acc would be odd.

confusedsteve

Thanks James, very very helpful. What was your view on the funds suggested by my IFA? By the way I'm not / wont be a high rate tax payer.

VT82

FLAPJACK wrote: »

As we are ok for income and capital, if we didn't rent it out the only monthly outgoing would be the council tax and water rates ....combined £113 a month.

Plus the opportunity cost of not earning interest/investment yield on your £85k?

mike88

VT82 wrote: »

Plus the opportunity cost of not earning interest/investment yield on your £85k?

Or losing money on investments remembering that the FTSE peaked in 1999 and the Nikkei in 1989.

jamesd

I don't see why acc versions are being used. I wouldn't use some of the equity income funds but I think the IFA may have chosen some of those because they are lower risk than average equity income funds.

VT82

mike88 wrote: »

Or losing money on investments remembering that the FTSE peaked in 1999 and the Nikkei in 1989.

Hence the 'interest' part of 'interest/investment yield' - if you don't want investment risk, stick it in a savings account. But missing out on this is still an opportunity cost if the house is empty.

mike88

VT82 wrote: »

Hence the 'interest' part of 'interest/investment yield' - if you don't want investment risk, stick it in a savings account. But missing out on this is still an opportunity cost if the house is empty.

The point is that as you get older you have to be more careful with any money you have. When you retire you have to bear in mind that any losses are virtually impossible to recoup as you no longer work and any earning potential is reduced.

I have sold my investment properties so now have 50% of my assets invested in the stockmarket and 50% in cash. Even if I lost everything in the stockmarket I would still be comfortably off. But Flapjack only has £300K so he has to be careful with suggestions of putting all his money into investments. His proposal to spread his risk by investing in a house next door to his seems eminently sensible to me.

Surely you are not suggesting that high yielding shares cannot lose money. If anyone thinks that they should go back to the drawing board.

darkpool

Rollerball wrote: »

If he spreads the money sufficiently I'd say it was. Dividends are on the up at the moment, he'll almost certainly get much more than 5% income per year on his initial investment in years to come.

You don't need to pay fund manager's inflated fees to do this, do it yourself and save yourself a small fortune every year.

i 100% agree with this. if you invest 15k into 20 different shares you'll have a fairly well diversified portfolio. i just don't understand why people here seem hell bent on unit trusts. why give away 3% of your money each year to an investment firm?

Aegis

darkpool wrote: »

i 100% agree with this. if you invest 15k into 20 different shares you'll have a fairly well diversified portfolio. i just don't understand why people here seem hell bent on unit trusts. why give away 3% of your money each year to an investment firm?

3% each year?? Who pays that?

I don't hold a single unit trust with a TER over 2% at the moment, let alone an AMC. Even a bank retail fund at maximum charges wouldn't get up to 3%.

Where are you getting your figures?