Investing for Income

Mr_Cautious

I am looking for advice on the best options to invest £500K to generate as much income as possible per annum. I do not want to be actively managing this investment but, at the same time, do not relish paying 1% management charges. Also, I am happy to sacrifice capital growth for income however keeping up with inflation would be ideal. I will be trying to manage my, and my wife's, income such that we fall in the 20% tax bracket. Thanks in advance for any ideas.

dunstonh

I do not want to be actively managing this investment but, at the same time, do not relish paying 1% management charges.

In which case you are going to have to compromise somewhere.

£500k is going to need ongoing work as you have annual allowances to use. If you are going with a bespoke portfolio then you need to rebalance. If you are going with a single multi-asset fund then you wont need to rebalance although you will need to assess your income to reflect investment returns and yields.

It is possible to get advised cases under 1% and certainly possible on DIY. However, if you plan no management of it then it will likely end up costing you more than 1% a year.

Linton

Its difficult if not impossible to have an income portfolio paying a reasonable but not unsustainable return (eg 4.5-5%) without actively managing it yourself or paying someone else to.

You can buy a range of UK dividend paying shares but then these need to be rebalanced and those companies that stop paying dividends replaced. Or (or perhaps more sensibly AND) you could buy a range of funds. This has the advantage that you can invest worldwide in both shares and bonds giving you a much more diversified income. But unless you are happy with a lower income you will have to go managed. Index funds in the past have not been readily available for income, one that was, the IUKD ETF, crashed by more than 50% in 2007-2009 as the banks used to pay high dividends and there was no manager to ensure good diversification. There is a Vanguard UK Equity Income fund using a specially commissioned highly artificial index on a low charge which in total return has beaten the average UK Equity Income fund over the past 5 years but its yield is given as 4.14%.

kidmugsy

Is any of the £500k already in (say) ISAs or SIPPs, or is it all tax-exposed?

Mr_Cautious

Right now it is in cash with our NS&I friends.

xylophone

Have you used your ISA allowances for the year?

Over this tax year and next you could get over £60000 between you into ISAs.

Remember that between you could earn at least 3% on over £100,000 by using interest paying current accounts.

You could have a joint trading account as well as individual ISAs.

You could invest in a range of income paying OEICs and investment trusts.

Mr_Cautious

We have been maxing out ISA's each year and would plan to continue doing that.

kidmugsy

Pensions: you have only a few weeks left of this tax year to make contributions. The new flexibility that the Great Pension Liberator has introduced makes them a far more attractive investment for many people.

jamesd

If you have pension allowance unused, you should first use that.

As a base set of investments I suggest that you consider:

1. 25% in peer to peer using at least two different P2P platforms that have expected pay rates in the 8%+ range. Better 3 platforms or more.
2. 50% in a global tracker fund.
3. up to 25% venture capital trust investing spread over several years to eliminate your basic rate income tax liability and provide some tax free income (assume 5% or so a year). Can sell after five years if desired without losing the initial 30% tax relief, capped at tax actually paid in the year of purchase.
4. commercial property funds or REITS, adjust percentage up or down to manage volatility along with the very low volatility P2P.
5. UK equity income funds

The P2P in 1 is as substitute for bonds because current bond prices are high, so poor value for money, and because they tend to provide stable capital values with little correlation with the stock market.

Once P2P is available inside ISAs the relatively high interest payouts would make them the first choice for using ISA money, to maximise the tax gain from using ISAs.

The idea here is that the P2P and commercial property provides most of the income, the global tracker fund provides the inflation protection and VCTs reduce tax liability while providing income. UK equity income does a bit of each, about a 50-50 split between income and inflation protecting.

Mr_Cautious

Thanks Jamesd. I had not thought of VCT's till now.

I do have £10k in P2P as a trial but you seem to be very bullish on them as a 'reasonable' risk asset class - am I interpreting you correctly??