Soon to retire -- a sustainable income?

Uncle_Stinky

How do I convert my ragbag of savings/investments into a fairly regular inflation robust income?

I am 64 years old, 10 months to State Pension. Due to health issues (not life shortening) I have been drawing on savings for the past 4 years.

I am married and own home, worth about £130-£140,000.
Auntie Stinky is currently receiving SP of £7833.28 pa.
I am receiving basic single life pensions of £713.04 pa, £2535.83 pa and from Feb 15 approx £2200, when I will also receive a SP of £10,161.84.

Currently we have TOTAL assets (excluding house) of about £400,000.
From a rough analysis these comprise:
30% Shares (some individual, some in funds)
7.5% Bonds/Gilts (all in funds, some part share/gilts, other 100% corp bonds)
37.5% NS&I linkers
25% cash (mainly ISAs). The last of the cash ISAs (currently paying 4.1%) ends beginning of April, the rest have already been bombed out for about 12 months. It is what to do with this 25% cash that exercises me most. Gilts don't seem to stack up at the moment.

I would like to draw a minimum £7000 pa (inflation indexed and forever) from these assets. Is this too ambitious?

Is there any way that I can utilise Auntie Stinky's unused tax allowance?

I would be grateful for any constructive comments (or otherwise, I'm big enough and ugly enough).

Wilkins

I think your ragbag portfolio is quite well structured as it is. My own inclination would be to gradually get out of NS&I (as they come up for redemption) and put more into equities, probably via ETFs and ITs, up to a maximum of 50% by allocation (leaving you with 17.5% still in NS&I). This should give you a better real income. Of course, you might not find the increased risk acceptable.

Others might advise you to reduce your cash holdings, but I would prefer to keep the 25% you have as a buffer against a market crash. If you transferred some of this cash to Auntie Stinky then she could use her unused allowance via R85.

£7000 from £400,000 is quite a modest real income (1.75%) and should be easily achieved in the longer run.

bigadaj

Seven grand a year, even inflation linked, seems eminently achievable with that value of assets.

How much capital are you looking at retaining and for how long? Is inheritance a big consideration?

Your split seems fine for someone of your age, the problem is that very one has chased yield on low risk assets, so bonds, gilts, cash, nsi etc are all paying very little. I'd still worry about the risk to capital in bonds and particularly gilts. Eleven your linkers will be paying relatively little, but they aren't selling any more so I'd definitely hang onto them if I were you.

Using the missus unused tax allowance should be straightforward just by transferring the assets into her name, though if they are in joint names any interest or yield will be split so that could also work.

With that mix then I would guess long term growth would be around inflation plus 2% though as you're finding now cash is struggling to even match inflation. That would give you about what you want higher yields mean higher risks and that might not suit your risk profile or attitude. There is an argument that you could put some of your cash into solid dividend paying shares, a spread of blue chips in a fund will yield 4-5% with the potential for capital growth but also loss.

I'd also recommend you getting a copy of time hale smarter investing book if you haven't read it, there are a range of portfolios he suggests in terms of risk and potential income which is good to see visually, it relies on the Barclays gilt equity study mainly dating back a. Hundred years, as to whether these times are more interesting I suppose nobody knows.

kidmugsy

For Auntie, consider buying her an Immediate Vesting Personal Pension. If you're quick about it you should manage to get one for 2013-2014, then you can buy another one in 2014-2015. Keep buying every year thereafter.

Then you seek 1.75% p.a. above inflation, which doesn't sound impossible. Have you considered lashing out some of the capital on a Purchased Life Annuity? Paying out forever is what they do. You'd buy it for Auntie, presumably, to exploit her Personal Allowance.

For the "real" returns you might reasonably expect from different asset classes over the next decade or three, have a look at
http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf

Remember that if you were to invest partly in bonds, partly in equities, you'd expect to make a bit of extra return by re-balancing your portfolio from time to time.

For low-cost investing see the Monevator blog. For handling capital to generate retirement income, see Wade Pfau's blog.

If I were you, and if I were averse to purchasing an annuity, I'd be considering moving that ISA cash into a mixture of bonds and equities, done by transferring the Cash ISAs into S&S ISAs. I'd expect to keep all, or most, of the ILSCs as a cash-substitute which I could draw on if I needed money when markets were down, meaning that I didn't want to sell shares or bonds.

jimjames

Uncle_Stinky wrote: »

How do I convert my ragbag of savings/investments into a fairly regular inflation robust income?

25% cash (mainly ISAs). The last of the cash ISAs (currently paying 4.1%) ends beginning of April, the rest have already been bombed out for about 12 months. It is what to do with this 25% cash that exercises me most. Gilts don't seem to stack up at the moment.

You've mentioned cash ISAs but not S&S ISAs. Are your shares/funds/bonds held in an ISA? If not then you could be missing out - certainly with the bond funds when income would be paid tax free.

Linton

Your aim of drawing £7K per year inflation linked from £400K is very unambitious. You should be able to very safely make £10K per year and quite likely more than that if you are prepared to vary your income take depending on market conditions. One sensible way in my view to approach your problem is to structure your portfolio to provide a number of focused sub-portfolios.

Perhaps something like:

£60K - 3 year cash buffer and £30K for any extra expenses.
£100K - Long term growth investments, including higher risk funds
£240K - income generation investments providing a 5% yield
- £100K high yield dividend paying shares
- £125K income funds - equity, corporate bonds, and government bonds

Then every so often (not more frequently than once per year) rebalance. Your cash buffer should allow you to weather any major market fall.

One problem will be tax, though you can get £22K into S&S ISAs each year. Your dividend paying shares will be tax free as long as the owner isnt paying HRT. With care you should be able to make maximum use of your joint £22K Capital Gains allowance.

Uncle_Stinky

bigadaj - Inheritance is not a major consideration, the kids are also big enough and ugly enough to look after themselves, although it would be nice to leave a bit. Majority of cash/shares interest is already in tax free wrapper, so no advantage in transferring to Auntie Stinky. I will check out Tim Hale portfolios. Thanks.

Thanks kidsmugsy - I had thought about Immediate Vesting Personal Pension for Auntie Stinky but considered it would take too many years to make use of all her available tax allowance. Will look at this again.
I was not familiar with Purchased Life Annuities, I will research again tomorrow when hopefully the absence of a bottle of Tempranillo will make the tax treatment a little more clear. Do you have a link explaining them for Dummies? Can they only be bought through advisers? I haven't seen much publicity about them, perhaps too niche.

Uncle_Stinky

jimjames wrote: »

Are your shares/funds/bonds held in an ISA? If not then you could be missing out - certainly with the bond funds when income would be paid tax free.

Yes, everything apart from a few £k in cash is held in ISAs or tax free.

Uncle_Stinky

Linton wrote: »

£240K - income generation investments providing a 5% yield

Not sure what sort of thing these may be? (Certain ITs, ETFs?)

kidmugsy

Uncle_Stinky wrote: »

I was not familiar with Purchased Life Annuities, Can they only be bought through advisers?

Googling should bring the info you need, including HMRC's rules. I imagine that you would use an IFA, to haggle to get Auntie best rates, and to advise you about this niche product. It might be wise to split annuity purchase over more than one insurance company but for modest sums it might be a bit expensive. Your IFA can comment.

The tax treatment is advantageous: HMRC counts part of the payment as return of capital and so it goes untaxed. The balance is taxed as income in the ordinary way, which for Auntie also means it would be untaxed if she buys just the right amount of annuity.

By the way I've just remembered another stunt that you MUST consider - deferral of your state pension, and Auntie's too. The exception would be if either of you has objective reason to think that you will have a short lifespan. For every year you defer, you will be rewarded with an extra 10.4% on your state pension when you start it up again. So it's as if you were buying an index-linked annuity paying 10.4% p.a. It's an extraordinary bargain; under the new style pension regime the reward will be halved, and no bloody wonder. Clearly while this deferring is going on you may find yourselves living partly off capital - no worries, that's just equivalent to paying for the annuity. I suggest you mug up on this before you spend any money getting advice on a PLA; for example start by working out how many years Auntie should defer for so that she will eventually exploit her Personal Allowance fully. In your case your extra pension will be taxed, so you might think the Auntie route the better one to take. Even if all you do is have Auntie defer for a couple of years, there's an extra £1600 p.a. or so, all of it still untaxed. Yippee.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210220/DWP024.pdf

Maybe that couple of years plus three or so IVPPs would exploit her Personal Allowance very nicely: then there would be no need for a PLA if that meant removing money from a tax shelter, which you mighty naturally be reluctant to do. If ever Auntie's unused P.A. widens out again, you can just buy her another IVPP to fill the gap.

P.S. I've just realised that you might well be able to gain from deferral too - start your SRP on time (I'm assuming that you wouldn't be a taxpayer in 14-15), then defer it for about a year or so from mid 15-16, calculated so that you avoid paying income tax in 15-16 and 16-17. Even this eventual taxed extra income of about £1k p.a. is potentially jolly useful; if you and Auntie both use the SRP-deferral route, you will already have made big inroads on your desired £7k p.a. at remarkably modest cost.

planteria

jimjames wrote: »

You've mentioned cash ISAs but not S&S ISAs. Are your shares/funds/bonds held in an ISA? If not then you could be missing out - certainly with the bond funds when income would be paid tax free.

i would agree with much of the above, not a bad split actually, and i agree with jimjames, get as much as you can into an ISA. you will be able to 'Bed & ISA' keeping your investments as they are, if you want to. dont delay as you will be able to do this year and next year's allowances in the next few weeks. potentially 2 lots of each, with your wife, and yourself.

and just to let you know that a 10 year old girl is laughing through her rice krispies that you call your wife Auntie Stinky;)