How do I calculate roughly the income on a lump sum if invested?

Harridan

My mother is selling her house and downshifting. She is in the classic position of having a huge asset and no income - she gets only about £130 per week pension. (IE about £6,700 p.a.).

She doesn't know what her budget should be for her next house because she doesn't know what lump sum she needs to invest to get a decent income. She'd be quite happy with an extra £4K p.a, but I have no idea how to work out for her what sum she would need to invest at what interest rate to get that income.

Can anyone help?

Thanks in advance.

ManAtHome

Quick & dirty way - at 5.2% you get a quid a week before tax (work on 80p a week after tax and you'll be slighhtly in front). Lots of accounts around at this rate, so £100k should give you £4k pa after tax (£5k gross).

Obviously interest rates can go down as well as up - for long-term planning, I'm sure some of the experts will along before too long.

EdInvestor

About 5% as a rule of thumb.It depends on what it's invested in and what tax wrappers are used.

dunstonh

I go with 5% net as that historically has always been achievable over the medium to long term. However, it really does depend on how and where it is invested.

Harridan

Brilliant, thanks all, I thought it might be that way, but it seemed too simple!

CLAPTON

things to consider.

is any of her pension due to pension credit... if she has cash and income from it she might loss the pension credit element.

secondly unless your mother is very old (and with all due respect is unlikely to live long ) then consider the effect of inflation.

currently inflation is running at about 4.8% so any return after tax of less than 4.8% means she is losing her capital.

just to give some examples
assuming inflation at 4.8%

for every £100 at todays value will only to worth £75 in 5 years
or only £58 in 10years
or only £47 in 15 years


so you would be better considering for your plan of only spending about 1 or 2% as she needs to save some of the interest to maintain her 'real' spending power.

Just consder that government inflation proof bonds only pay inflation plus 1.35%