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Generating an income from large lump sum

I recently had to stop work due to disability and received a substantial lump sum. I am now looking for ways to generate a reliable income to live on without having to spend the capital as I have just over 20 years until retirement age. My only other income is a small amount of disability benefits.

The safest thing seems to invest the money into a range of fixed rate cash bank/building society bonds but as rates are so low an IFA I spoke to suggests I might want to consider investing in income generating unit trust or OEICs. Is this a sensible thing to do? I am worried that the income from this will not be reliable.

Are there any other low risk options open to me other than investing in property which I don't want to do as it's too much hassle?

Thanks.
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Comments

  • HappyMJ
    HappyMJ Posts: 21,115 Forumite
    10,000 Posts Combo Breaker
    Investing some of your capital into a unit trust may be a good idea. It is unreliable income so the majority you might want to keep in long term secure bonds.

    Returns are so low that you will probably be spending some of the capital.
    :footie:
    :p Regular savers earn 6% interest (HSBC, First Direct, M&S) :p Loans cost 2.9% per year (Nationwide) = FREE money. :p
  • jimjames
    jimjames Posts: 18,891 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    Investment trusts (similar to unit trusts) are likely to have a more stable income. Some have records dating back 40 years of increasing income payments each year. Although your capital might vary you are far more likely to keep up with inflation over that timescale with share based investments.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
    Part of the Furniture 10,000 Posts Combo Breaker
    You should be able to get around 4% of your lump sum pa in dividend income, on which a basic rate tax payer doesn't have to pay further tax. If you'll get state pension later on, and this means you can take less income, then perhaps 5-6% pa.

    However, the above assumes that you invest in a mix of equities and bonds, which always introduces some volatility to your income. You can reduce volatility by using more bonds, but this reduces what you can draw per year.

    Investment Trusts hold a dividend reserve, so these are a good option, but you will also need cash holdings to cover emergencies, ideally index linked.You also need a basket of over half a dozen income and growth investment trusts.

    What's critical here is what percentage of the lump sum you need per year now, and how much after state pension kicks in.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • BLB53
    BLB53 Posts: 1,583 Forumite
    For a period of 20+ years, I think you need to be looking at equities rather than cash or bonds.

    The problem with OEICS, apart from higher charges, is the limitation of having to distribute ALL income - which is OK in good years but could be a significant problem when dividends are cut like 2008/09 and also when a big hitter like BP suspended its dividend in 2010.

    The better option is investment trusts as they have more flexibility and dividend payments are much smoother.

    I hold City of London (4.8% yield), Merchants (6.5%), Murray International (4.2%), Temple Bar (4.1%), F&C Commercial (5.9%) and Henderson Far East (5.5%)

    The advantage of equity income is that over the longer term, your income should keep pace with inflation.

    Good luck.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
    Part of the Furniture 10,000 Posts Combo Breaker
    BLB53 wrote: »
    I hold City of London (4.8% yield), Merchants (6.5%), Murray International (4.2%), Temple Bar (4.1%), F&C Commercial (5.9%) and Henderson Far East (5.5%)

    A nice crop of ITs! What do you use for uncorrelated assets, if anything?

    The advantage of "all in one" funds that also hold bonds, property etc., is that I guess the OP is going to be holding this unwrapped (not in ISA or pension) so will need to rebalance with care due to trading costs and CGT.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • BLB53
    BLB53 Posts: 1,583 Forumite
    What do you use for uncorrelated assets, if anything?

    I am not a big believer in gilts in the current climate but do hold various PIBS and corporate bonds which provide an average yield of 7%. However I would not class them as uncorrelated to equities - as we saw in 2008/09, when the storm hits everything is affected.

    With PIBS, the important criteria is the solidity of the issuer so hold Nationwide and Coventry.

    Also forgot to include Aberforth Smaller in previous post (yield around 4%)
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
    Part of the Furniture 10,000 Posts Combo Breaker
    BLB53 wrote: »
    I am not a big believer in gilts in the current climate but do hold various PIBS and corporate bonds which provide an average yield of 7%. However I would not class them as uncorrelated to equities

    Agreed on both counts.

    As you probably know, I use preference shares, corporate bonds and also some infrastructure funds.
    Also forgot to include Aberforth Smaller in previous post (yield around 4%)

    I've been considering that one for quite a while.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • BLB53
    BLB53 Posts: 1,583 Forumite
    I've been considering that one for quite a while.
    Now would be a good time imho.
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    edited 22 May 2012 at 8:11PM
    For long term needs like yours it is effectively essential to use investments like those mentioned by the IFA. It's completely standard practice to use them. A major reason for this is inflation. Savings accounts tend to pay no more than about 1% above inflation. Investments can pay more like 4-6% above inflation in the form of a mixture of income and growth. That can make a huge difference to the potential income you can prudently take without depleting the capital.

    The capital values vary up and down routinely, typically by 10% or so a year, perhaps 20-30% for some of those that pay the most. The income levels vary less.

    You don't need to be greatly concerned about varying income levels because you can easily protect against it:

    1. Put three or four years of spending money into a savings account.
    2. Have the investment income paid into the savings account.
    3. Set up a standing order from the savings account into your current account to provide your regular monthly income.
    4. Review the savings account balance annually.
    5. Either adjust income or top up with investment capital if the savings account balance has fallen by 20% or more at one of the annual reviews.

    Three or four years in the savings account with even a 10% income variation will take many,. many years before it'd be necessary to do any selling of investments even if there was a sustained drop in income levels.

    You do need to prepare yourself for the capital variations. They are unsettling at first until you've seen a couple of cycles of ups and downs. The saving account is key here, because you know that your regular income won't be disturbed by the routine variations in investment values.
  • phuket
    phuket Posts: 47 Forumite
    Thank you all for your very helpful replies. I have a few questions on what has been said so far.

    >You should be able to get around 4% of your lump sum pa in dividend income,

    - is the likely 4% return gross or net after charges have been deducted ( I never know whether yield figures are gross or net)

    >The better option is investment trusts as they have more flexibility and dividend payments are much smoother.

    - What are the key differences between trusts and OEICs
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