Options for investing capital to provide retirement income

worried50

My mother is a widow at age 61 following the sad early death of my father. She gave up work in her 20s to have children, so has only a meagre final salary pension of £95 per month from the time she did work. She will get the full basic state pension as she topped up her NI contributions in about a year's time.

She owns her house outright. After paying off some debts she will have capital of approx 200k and this needs to be invested to provide an income for the rest of her life. She is a fit, healthy and active 61 yr old and wants to live her life to the full, and travel.

Someone suggested to me that she should buy an annuity. However looking at the rates, to me it does not seem worth sacrificing her entire capital for what would still leave her on a low income. She could get a similar return on her money by buying a property to rent, and rent increases over time. She would also still retain the capital.

The amount she has though would only buy one decent property, so this puts all eggs in one basket. I was thinking it may be better for her to invest in funds instead, so giving her exposure to a portfolio of assets.

Does anyone have any advice on where to start research and what type of approach we should be considering please? Many thanks.

jem16

worried50 wrote: »

Someone suggested to me that she should buy an annuity. However looking at the rates, to me it does not seem worth sacrificing her entire capital for what would still leave her on a low income. She could get a similar return on her money by buying a property to rent, and rent increases over time. She would also still retain the capital.

The annuity would certainly give your mother peace of mind and a secured income. For many this is paramount.

As for BTL, this is not something I would consider and I'm in very similar circumstances although I will have a good defined benefit pension. Too much hassle of managing the property or getting someone to do it for me, coupled with the worry of not being ale to find tenants or finding bad tenants. You really need more than one property to make this a realistic venture.

The amount she has though would only buy one decent property, so this puts all eggs in one basket. I was thinking it may be better for her to invest in funds instead, so giving her exposure to a portfolio of assets.

That would be one option. She could use both the annuity for some secured income and an investment portfolio for the rest.

Does anyone have any advice on where to start research and what type of approach we should be considering please? Many thanks.

What does your mother want? Does she want the security of an annuity or is she willing to take a bit of risk with some or all of it?

As to DIY research Trustnet would be a good place to start. Does your mother know enough to DIY? If not I would suggest seeing an IFA with that amount of money. Use https://www.unbiased.co.uk to find someone local.

dunstonh

Someone suggested to me that she should buy an annuity. However looking at the rates, to me it does not seem worth sacrificing her entire capital for what would still leave her on a low income. She could get a similar return on her money by buying a property to rent, and rent increases over time. She would also still retain the capital.

Generically, the annuity fits the purpose. However, market rates are not great and although you can get some death benefits factored in, you are likely to find it is better than cash savings but not by much more. The problem is that it is for providing a guaranteed income for life. Guarantees cost.

She could get a similar return on her money by buying a property to rent, and rent increases over time. She would also still retain the capital.

That is an option but its jumping around the risk profile somewhat from an annuity. The annuity is effectively the safest option. Property involves investment risk, periodical capital outlay, potential void periods, administration and the purchase of an illiquid asset (which may or may not be a problem). Some people dont mind taking on the work. Others dont want to.

The amount she has though would only buy one decent property, so this puts all eggs in one basket. I was thinking it may be better for her to invest in funds instead, so giving her exposure to a portfolio of assets.

Again, this involves investment risk but is lower work if she uses an IFA but would involve work if she DIY. It is by far the most common method used by people. However, annual use of pension and ISA allowances could achieve the goal. However, it all depends on what your mother is willing to accept.

xylophone

Are there any widow's benefits arising from your late father's occupational/personal pension arrangements?

Has she looked into state benefits? https://www.gov.uk/browse/benefits/bereavement
http://www.telegraph.co.uk/finance/personalfinance/consumertips/9254672/Nine-in-10-widows-unaware-that-they-are-entitled-to-state-aid.html

Is she using her cash/stocks and shares ISA allowance?

The £200,000 could be invested in funds etc to provide a monthly income with the prospect of capital growth - if for example, she were to start with a full stocks and shares ISA invested in monthly /quarterly/ half yearly income paying funds, she could gradually transfer over into ISAs to get as much income as possible on a tax free basis.http://www.hl.co.uk/

She could also look at an annuity, particularly if the paramount consideration is security of income- an IFA might well be able to obtain a better rate than she can through personal research.

jamesd

What is the minimum income she needs for basic living expenses, nothing else? This will help to work out the minimum income needed from whatever method(s) are used.

With income drawdown it's perhaps sensible to assume that no more than 70% of the income will be available for the basic living expenses part of income, allowing for the inherent income variability of this option. The available income depends on the investment risk taken and desire to avoid capital loss, with values from 4-6% being reasonable, likely 4%-5% or so being most sensible at this sort of age. If using income drawdown it's also possible to gradually spend some of the money on annuities as she gets older, say starting from age 75 or 80, ages at which the annuity payouts tend to be more worthwhile.

With £200,000 it's possible to buy more than just one property and it would be essential to buy more than one for diversification. Mortgages should be used to do this, ideally secured on her own home because those would have lower interest cost than a BTL mortgage secured on a BTL property. Decent BTL properties would tend to be near the relatively inexpensive end of the market in many places, often bought when needing refurbishment so the refurbishing adds to the property value quickly.

One excellent way to help her meet her basic income needs is to defer taking the state pensions. This adds 10.4% a year to the amount paid for each year of deferral and that gets inflation protection as well. It's far cheaper than using an annuity to get the same level of extra income. Optimal for a woman in good health tends to be three to five years of deferral. The amount added for new deferral time will probably fall once the flat rate pension scheme comes in so its' good to do deferring before then.

Now is also the time to consider whether she wants to continue to live where she is long term or whether she'd want to move to a place that might be easier and cheaper to maintain and live in and potentially might release more capital to use to provide her income needs.

xylophone

The OP says that his mother does not work and that her income is £95 a month - surely she cannot be subsisting on this?

A lump sum of £200000 in building society accounts at present rates would barely provide £4000 a year.

Surely there must be some other income somewhere? Do we have the full picture?

kidmugsy

61 is early to buy an annuity. The subsidy you get from other people dying earlier than you doesn't really set in until the age when people start to die in appreciable numbers - say about 75 onwards. So in your shoes I'd recommend looking at investment, principally in equities. Except that they seem pricey to me currently, as do virtually all other assets. It's very difficult for pensioners at the moment - interest rates are being artificially depressed to try to rescue debtors from their idiocies in the Greenspan/Blair/Brown years.

One thing she could try is deferring her State pension for a few years and living off capital instead. She'd then take extra State Pension as her reward when she eventually starts it - that's equivalent to buying an inflation-linked annuity that pays 10.4% p.a., an extraordinary bargain. Two caveats: (i) keep an eye on the reduction of reward planned for the start of the new State Pension regime, and if it would affect your Ma suggest that she start her State Pension before the new regime impinges on her, (ii) Ask yourself whether you can trust future governments to honour the promise of extra rewards for life.

quotememiserable

A lot of it depends on your attitude to risk. I have money spread across share funds, property and peer to peer lending. It provides a blend I like - I use a lettings agent for the property so it doesn't require much input from me and accross this portfolio I generally return about 8%. Capital is at risk on all three parts of course.

atush

We need to know her full pension situation incl state pension (if not in payment now when would it start) and any survivors pension from your father.

Knowing her thoughts on risk profile/guaranteed income would help too.

If she has any income over the 95 per month, it might make sense to live off interest/income until she get gets her SP. If she is in receipt of other income form your father, a combination of annuity and investments might work well.

I guess we just don't know enough,

worried50

Many thanks everyone.

No I had not given quite the full picture. My parents have been living off capital from a house sale a few years ago. They also had received an income from my father's parents who take the advice of their accountant for IHT planning purposes. The indication from my grandfather is that he will continue to pay this to her - but it will of course only continue whilst he is alive as it comes from income from a good final salary pension.

My dad was made redundant from a large firm at age 41, having worked for them for 20 yrs. He does have a final salary pension, but the formula to explain what my mum will be entitled to is quite complex. It won't be much as he wasn't a high earner. After losing his job my parents ran their own business until they retired, but didn't make any more than enough to support us just, so no further pension planning. My father only died a week ago, so we have not yet been able to send death certificate to pension provider in order for my mum to get a projection. My father was about 2.5 yrs off receiving his pension. This post is really an attempt to allay quickly my mother's concerns over what she will live on. It'll take a while to get the detailed estimates of his pension.

Sadly whilst running the business and then after retiring early (due to poor health and fact the business wasn't really worthwhile), my father had always been living in the knowledge that he would inherit from his relatively wealthy parents. He's now died before both of them so won't inherit. I understand this will pass to my sister and I, and whilst I being financially comfortable would happily use this to ensure my mother has a good retirement, i don't know what my sister would do.

Regardless, I have a different attitude to my father and am not prepared to rely on that as who knows what may change. I know what she has now and want to plan with that.

In terms of downsizing they've done that relatively recently and my mother now lives in Wales.

I discussed annuities with her and she really dislikes the idea. Her essential living expenses are relatively low, and I'm hopeful that her state pension, plus her pension, plus what she will get of my dad's pension will be enough to cover those costs. Then i hope that any additional income can be used to give her a better quality of life. Despite the relatively wealthy in laws my parents have not had an easy life, with redundancy then trying to make their business work. I want to help her get this right so she can travel a little.

In terms of my father's pension, I have the statement from when he left work, but there are 5 boxes with numbers in so I don't know which is the figure he would have received. Would it be "paid-up pension including GMP", "Revaluation at Normal Pension Date - on GMP benefit", or "Total Pension at Normal Pension Date"?

worried50

I just want to add something as feel I did a disservice to my dad above. Between selling their house in the south east my parents went to live in Italy, bought, renovated then sold for a profit a couple of properties. They also did a bit of property management for Brits with holiday homes. So they worked hard and weren't completely living off capital.