What income can I expect from £1m+?

kidmugsy

I'm sorry, OP, I wrote you a detailed reply but it's vanished into the ether. The gist of it was that you and your wife should find it easy to avoid 40% income tax in retirement, and CGT too [as long as you don't sell lumpy investments (e.g. property)] so that the target is to get a high enough yield that might grow with inflation, and to avoid as much tax as possible. Assuming that you will each eventually get £7k p.a. State Pension (and that you will bridge the gap between retirement and state pension age with the tax free lump sum from your SIPP) then your target comes down to £46k p.a. after tax, with the SP using a large part of your personal allowances. You can't achieve that and keep the properties with their poor yields (and tax-exposed yields) - you'd need an absurd yield on the remainder of your wealth to compensate.

So start to sell the properties, and put capital into ISAs for each of you. However, even then you might find it all a bit tight - and you might not be comfortable being invested nearly 100% in equities when you face the first market collapse of your retirement. In other words, you're not really rich enough to go for an inflation-protected £60k p.a. without drawing down some capital. Of course if you are happy to avoid eventual IHT by spending capital, that's fine.

But cheer up - you may not need £60k p.a. It's very common for pensioners to report that they find themselves jogging along happily on much less than they thought they'd need.

One caveat: you could try the Harry Brown Permanent Portfolio ("PP"). The PP is intended to return nearly as much as an equity investment but with much less volatility. That might give you the nerve to ride out a stock market collapse. If you assume that equities will yield 3% p.a. real (i.e. above inflation) for the rest of your life, and that inflation when you retire is about 3% p.a., then you have a chance of achieving your aim. At least you'd have much more chance than if you simply retained all your property.

cashbackproblems

What ridiculous advice to get rid of your BTL's, London property prices have only ever gone one way, the FTSE index will be up and down for the foreseeable

Linton

cashbackproblems wrote: »

What ridiculous advice to get rid of your BTL's, London property prices have only ever gone one way, the FTSE index will be up and down for the foreseeable

Increasing price of property is of no value whatsoever if you need income. That's a problem with buying property, you cant sell off a bit of it each year to pay your grocery bills.

kidmugsy

1) By my arithmetic only number 2 (yielding 5.87%p.a. while you've got a cheap mortgage) and number 5 (5.75%) are giving you a decent yield. If you keep the others you are just punting on indivisible, undiversified, illiquid, low-yielding investments. Of course, if you are blessed with the perfect foresight of cashbackproblems you'll soon be as megarich as he must presumably be.

2) But you may have another problem: have you calculated how much CGT you'll have to pay when you sell properties 1, 3 and 4? This may result in your having less capital than you think you have. Of course there is a sure way to avoid CGT: hold the properties until death. That might not appeal.

I'm afraid you're just not very rich. If (God forbid) you appeared in the tabloids you'd be sneered at as a fat cat millionaire. But as Clapton pointed out, "an indexed annuity at 60 would deliver about 2.5% so if you used the million that means you get about 25,000 per annum", which is a pension that quite a few government employees are going to pocket who would bridle if told that they were fat cats.

Of course if somehow interest rates and other forms of return on capital were to get a lot higher in the next few years, and you happened to have sold your property and avoided the property crash that would result from a big rise in interest rates, and had had the brilliant foresight to hold your capital in cash and cash-like investments, then you'd become much better off for income. But do you really want to bet on being able to foretell the future?

cedarmay

cashbackproblems wrote: »

What ridiculous advice to get rid of your BTL's, London property prices have only ever gone one way, the FTSE index will be up and down for the foreseeable

I have found property to be a good investment. But as Linton says, I now need assets that generate income rather than just capital gain.

cedarmay

kidmugsy wrote: »

1) By my arithmetic only number 2 (yielding 5.87%p.a. while you've got a cheap mortgage) and number 5 (5.75%) are giving you a decent yield. If you keep the others you are just punting on indivisible, undiversified, illiquid, low-yielding investments. Of course, if you are blessed with the perfect foresight of cashbackproblems you'll soon be as megarich as he must presumably be.

2) But you may have another problem: have you calculated how much CGT you'll have to pay when you sell properties 1, 3 and 4? This may result in your having less capital than you think you have. Of course there is a sure way to avoid CGT: hold the properties until death. That might not appeal.

I'm afraid you're just not very rich. If (God forbid) you appeared in the tabloids you'd be sneered at as a fat cat millionaire. But as Clapton pointed out, "an indexed annuity at 60 would deliver about 2.5% so if you used the million that means you get about 25,000 per annum", which is a pension that quite a few government employees are going to pocket who would bridle if told that they were fat cats.

Of course if somehow interest rates and other forms of return on capital were to get a lot higher in the next few years, and you happened to have sold your property and avoided the property crash that would result from a big rise in interest rates, and had had the brilliant foresight to hold your capital in cash and cash-like investments, then you'd become much better off for income. But do you really want to bet on being able to foretell the future?

I think it may make sense for me to sell one or more property, and invest in equities that could yield a better return. I want to keep some properties - I would not feel comfortable being totally in equities, unless there was clear evidence that it makes investment sense to do so.

I could either sell lower yielding property and look to purchase a higher yielding property. I ignore claims of 8,9,10% yield, as this always refers to 'gross rental yield' which isn't the measure that matters to me (and surely shouldn't be the measure for any investor?) I am only interested in net yield, i.e. after all costs. Realistically I could probably find other properties similar to the ones that generate 4% and 5% net yield after costs. The house price gain on these over the last 4 years has been approx 4% p.a. so I could reasonably expect 8-9% total return on investment.

The alternative would be to sell and put around £300,000 into stocks investments. This would give me more balance - increasing my stocks to around £550,000 and value of property held reduced to around £1m, of which £550,000 would be equity after mortgages.

If I do this, could I improve on the 4-5% yield and 4% growth of my higher yielding properties?

I thought a £60K net income after tax may be a realistic target on £1.3m of stocks and properties but maybe it isn't.

kidmugsy

One prob with holding just property and shares is that they tend to be correlated i.e. move up and down together. That's why you come across asset allocation portfolios which try to hold a mix of assets that will be (maybe!) uncorrelated, or negatively correlated i.e. will tend to move in opposite directions. They seem to be designed mainly to preserve capital, though, whereas you will be interested in preserving, and even inflation-linking, income. But many retired people should, like you, attend more to income than capital. Preserving capital so that it pays Inheritance Tax sounds like a mug's game.

One last thought; even if you sell three properties over the next few years, you'll still be left with two, plus (I assume) your own house. That would still be a large chunk of your capital in property.

"I would not feel comfortable being totally in equities": nor would I. That's why it might be worth your while googling Harry Browne Permanent Portfolio. Slowly moving your portfolio in the direction of Mr Browne might be a reasonable bet. At least that portfolio isn't based on just assuming that you know what the future holds. On the other hand, the fact that the portfolio would have done well in 1972-2012 doesn't mean that it must do well in future.
http://earlyretirementextreme.com/wiki/index.php?title=Permanent_Portfolio

kidmugsy

On second thoughts: my remark about income in my comment above is probably wrong-headed. You can sell chunks of a PP to get the annual money you'll need. That's an advantage of shares/bonds/cash/gold; unlike property, they are divisible.

plunt

you could also take a look at peer to peer lending. Fairly easy to use, but ofcourse always have a risk!

If you go with a provider such and thincats you can lend out bigger chunks so may be easier, they have also done an inflation linked product recently too

http://www.knowledgepeers.com/networks/855/ifeblog_thread.html?threadid=1766

atush

Do make sure to put properties in both yours and your spouses names, to take advantage of both CGT allowances- esp for the lower yielding ones you might sell.

mugsy is right, even if you keep 2 (plus your own home) you will still be heavily into property.