Income from Savings

patch303

I have various ISA's that I wish to use as income and so leave the capital intact. I presume it makes sense to get this income from tax free savings though I am reaching the stage where I do not want to put the cash at risk to market forces. Any advice on experiences on income from savings would be great. Regards

dunstonh

It depends on your tax position as to how its best to do it. Sometimes withdrawal of capital is best with natural income re-invested. That has the advantage of giving you a fixed monthly amount. However, it does mean that you need the investment to grow by the amount it is making to cover the withdrawal.

Other times, its good to use natural income but the income may be at quarterly or half yearly intervals.

I am reaching the stage where I do not want to put the cash at risk to market forces

There is no such product. Savings accounts (cash) suffers heavily with inflation eating into it. Inflation is currently at 3.9% so you you need to be beating that just to stand still. The "safe" options barely cover that and if you are drawing the return as well then your money will be going backwards. As has been said in a couple of threads recently, if you draw the money out and get no capital growth you would be experiencing the equivalent of a stockmarket crash every 5 years to your capital in real terms.

You can however, manage the risk as it isnt an on/off situation but a whole sliding scale and you can build relatively low risk portfolios that should offer what you need over the long term.

patch303

Thanks dunstonh for your information. Maybe I am looking for the Holy Grail but short of that I will need to do more research it seems.
Thanks and Best Regards Patch303

dunstonh

The products are there with the suitable fund options to give you a sensible spread with low risk. The minute you ask for capital guarantee though, you start paying for it. Either in a reduced return or increased charges.

There are some investment products and providers that have return of capital invested (minus withdrawals) on death if the value has gone down. There are others where you can buy a guarantee a capital with an increase in the annual management charge.

Some also have a "lock-in" facility protecting growth. i.e. if the fund goes up 15% one year, then the worst it can drop back is 5% as it has a 10% locked in value. As mentioned above though, adding these options will increase the charges. The charges over a 10 year period can equate to the same amount as a stockmarket crash and if you have a portfolio that is only invested with 30% in the stockmarket, then the impact of the crash when it happens is going to be limited so is it worth paying those extra fees.

So, whilst a cast iron guarantee product with high return for income is a Holy Grail, it wont take a lot of compromise to get you an income that you will be happy with at a level of risk that should be suitable.

System

The minute you ask for capital guarantee though, you start paying for it. Either in a reduced return or increased charges.

..... but can they beat the interest given by the average regular savings account?

dunstonh

..... but can they beat the interest given by the average regular savings account?

regular savings accounts are not suitable for someone wanting an income as you cannot draw from them without it hitting the high rate.

patch303

I guess what I am really unsure about is the way to go with income from savings. If the savings are at present in a saving account that has a taxable return such as a Halifax Websaver should I consider putting all the websavers money into something like a Halifax Guarenteed Reserve Bond at 5.27% with capital untouched but tied up for 2 years. Where £100,000 will give an income of £436/ month gross. But if the savings are in ISA's or non taxable returns should I consider putting them into something like the Artemis High Income Fund for a quarterly income though at the risk associated with bonds and equities or also transfer these to a Halifax Guarenteed Reserve Bond at fixed interest for a preset term. I know the answer probably is 'who knows' but maybe past experience over a few previous years might be a guide. Thanks for reading
Regards Patch303

oldfella

But if the savings are in ISA's or non taxable returns should I consider putting them into something like the Artemis High Income Fund for a quarterly income though at the risk associated with bonds and equities or also transfer these to a Halifax Guarenteed Reserve Bond at fixed interest for a preset term.

---

you can regard fund investments as purely income providers - in the long term capital value will go up and down, just try and not worry about it. They should give you a healthy long-term capital growth - just dont rely on it in the short-term. However, most UK funds only produce dividends of 3%-3.5%.

Mike

dunstonh

you can regard fund investments as purely income providers - in the long term capital value will go up and down, just try and not worry about it. They should give you a healthy long-term capital growth - just dont rely on it in the short-term. However, most UK funds only produce dividends of 3%-3.5%.

Although withdrawal of capital is another way of doing it to make up for that. i.e. invest in a portfolio with a combination of income/growth funds to match risk profile then withdraw 5% p.a. on a monthly basis. Withdrawal of capital isnt classed as income so the 5% is not taxable. As long as the investment grows by more than 5% (which historically has been the case) then you should be fine.

cheerfulcat

dunstonh wrote:

Although withdrawal of capital is another way of doing it to make up for that. i.e. invest in a portfolio with a combination of income/growth funds to match risk profile then withdraw 5% p.a. on a monthly basis.

This is a very risky approach, though. Do this in a market downturn and you will be eating heavily into capital, which results in less income, which means eating into capital some more...

patch303 wrote:

But if the savings are in ISA's or non taxable returns should I consider putting them into something like the Artemis High Income Fund for a quarterly income though at the risk associated with bonds and equities or also transfer these to a Halifax Guarenteed Reserve Bond at fixed interest for a preset term. I know the answer probably is 'who knows' but maybe past experience over a few previous years might be a guide.

If you are intending to use this money for income for any length of time then stock market exposure is vital; left in cash, the capital will slowly dwindle away.

Keep the ISA money in the ISAs. It makes sense to use ISAs for growth shares, holding income shares outside of tax shelters because a basic rate taxpayer has no further tax to pay on dividends. A HR tax payer would benefit from keeping income shares in an ISA.

There are some interesting threads on TMF about investing for income; have a look at the Retirement Investing board for a start. The High Yield Portfolio may also be of interest. If you click on " Recs " at the top of the column the index will be sorted by recommendations; that will take you to the most interesting discussions.

HTH

Cheerfulcat

dunstonh

This is a very risky approach, though. Do this in a market downturn and you will be eating heavily into capital, which results in less income, which means eating into capital some more...

Its not a very risky approach at all. It depends on what sector spread you have and can easily be lower risk risk than relying on dividends. A risk 4/5 sector spread compared with equity income funds at 6/7 is lower risk.

I point towards LTSB shares again as an example of higher risk on the HYP.

I have a large number of these (as would most investment advisers) which have gone through the crash and out the other side happily paying 5% p.a. net (on a monthly basis) with decent capital growth as well.

If the income is reinvested and say averages 3%, then you are only picking around 2% of the growth to make up the difference. Plus withdrawing capital can also help on the tax front as it isnt classed under income tax (or age allowance).