Most tax efficient and low risk way to invest £1m today for an income

adindas

Millyonare said:

Slap it in a 10% dividend fund and bank £80k net per year.

Did you notice what the op is looking for ??

"Most tax efficient and low risk way to invest £1m today for an income" 

In my personal opinion, taking some level of risk is not a bad thing. Certainly people do not take the risk for nothing. It will only make sense if the risk vs reward is overwhelmingly leaning on the Reward and to be compared to visible risk free alternative.

It will need to look into Risk, Reward and risk tolerance of the person in question altogether, not in isolation.

In this case, the op has spelled it out he is looking for low risk. He will have a hard time to find one.

unitedwestand

born_again said:

unitedwestand said:

Say you win £1m in the lotto and chuck your job. Now savings rates are higher what would the most tax efficient way to invest it for a return. 

To start off I was thinking. 
£20k in an cash ISA
£50k premium bonds

Open 5 savings accounts with £80k each and 1 with £40k (FCA protection) for a total of £440k with a target return of 3.99% p/a
This would give you £17,556 of interest.
Because you have no income I believe you would qualify for the starting savings rate of 0% for £5k plus still have a personal allowance of £12,570 so £17,570 total would be tax free.

Then you could try invest to make £1000 in dividends and £6000 in capital gains both of which are 0%.

If I'm correct/ this is possible at this point in the first year you've been able to invest £94,570 essentially tax free in year one.

There's also pension allowances/ backdated allowances however the aim would be for current income assuming not of pensionable age.

Next you could focus on dividend income which if you're not getting an income believe would only taxed at 8.75% at the basic rate after the £1k allowance.

I can't think of any other simple ideas for income that won't be taxed fairly significantly thereafter, any ideas? 

You missing out the bit where you buy new house, new car, treat family etc...

A new house, maybe as your primary residence is exempt from capital gains tax. However it's not income producing. In addition it would depend on circumstances. The winner could have a 10 year fix mortgage at around 1.5%, it would be pointless paying that off when easy access savings accounts are currently yielding 3%. Further still many perceive we magic bricks that will always appreciate in value no matter what. The UK currently has a housing deficit and high population of boomers born after the war. Depending on the age of the lottery winner, they may out survive this generation and it's not clear if property returns will slow against other investments. Throughout history it's not uncommon for people to find themselves negative equity. 

A new car is one of the fastest deprecating assets/ investments you can make. 

The hypothetical question was based on investing not gifting. Again it would be circumstantial anyway as often given money to certain family members can be the poorest investment for the family collectively particularly spouses and children with legal entitlements under inheritance laws albeit depending on age it might be worth gifting the circumvent inheritance tax. 

unitedwestand

steampowered said:

There are different types of risk. "Investment risk" is the risk of an investment going up and down in value. But also think about "Inflation Risk" - the risk of inflation eroding the capital over time.

A sensible investor would understand this and balance the different risks. For most people with £1 million that means a sensible portfolio of stocks and shares. Potentially also things like corporate bonds depending on risk appetite.

The approach described by Op does not really generate an income. 4% interest on savings accounts doesn't even keep up with inflation at the moment. If you are taking that interest and using it as your income, the value of your capital is being eroded year after year.

£1 million in 10 years time will be worth a lot less than £1 million today. So don't fool yourself into thinking this is capital preservation over the long term even if the numbers on your bank statement don't change.

Phrasing this another way: If you decide to put all of your wealth into savings accounts, that is "low" investment risk but it is "high" inflation risk. If you do that, your capital is going to be eroded over time. 

Although historically correct with regards to real returns against inflation, currently when you have the central bank and PM both putting their reputation on the line that they'll get back to target inflation of 2% and long-term saving fixed rates as high as 4.5%+, the highest since 2009... cash once again may be king. Equities have just through one of the longest bull runs in history. Bonds have recently proven to not be the safe haven they were once through of. The market is circular, debt of the world's largest economy is at historic highs I think it makes for an interesting question because of these factors at the moment and interesting to get others take.

unitedwestand

Albermarle said:

The market is very jittery at the moment

They have been a lot more 'jittery' in the past, and no doubt will be at several points in the future.

True, but protected fixed rate savings haven't been so. The gamble is against real returns and with rates at 14 year highs against inflation forecast to drop I think cash is once again a valid consideration. 

Malthusian

unitedwestand said:

Equities/ Bonds.

Which have always been jittery and always will be. From the perspective of a long term investor, that is the point of them.
When was the last time you perceived equities to not be "jittery"? January 2020 maybe?

As long as you can fix above anticipated/ targeted inflation which you can just now and have your savings below the £85k protected limit cash is always the lowest risk investment to return.

Depositor-insured cash is always the lowest risk investment whatever the Bank of England's target is at the moment. 
You are putting a lot of faith in the idea that inflation will be below current fixed-term savings rates because the Government wants it to be. I'm not saying that it will be 10%pa forever, or persist at 5%pa, because I have no idea. But the Bank of England's inflation target tracks CPI inflation, not the other way around (where it is not being handwaved away under "exceptional circumstances"). It isn't a coincidence that when Gordon Brown set the target at 2.5% RPI, the RPI had been 2.5%-ish since the Major government.
Regardless of the Bank of England's target, a diversified investment can be expected to outperform cash over the long term (however long that turns out to be). If it doesn't in the long term (people who take risk get lower returns than those who take none) then something is broken in the global economy. 
The most tempting time to keep money under the mattress is when equity markets have recently done badly and risk-free interest rates have jumped up; it is also the time it is most likely to be the least rewarding option. (In the short term; in the long term it always is.)   

  From Dec 21 to Oct 22 the s&p 500 fell 25% that's not low risk.

No-one said it was. A 100% equities investment is inherently very high risk and a 100% equities investment in a single country is a very high risk investment with high specific risk (i.e. voluntary risk with no expected reward). A 25% fall is a blip for a single country stockmarket index.

Malthusian

unitedwestand said:

A new house, maybe as your primary residence is exempt from capital gains tax. However it's not income producing. In addition it would depend on circumstances. 

Yes it is. The money saved on rent is income. And tax-free income at that.
The alternative for a non-homeowning lottery winner who doesn't want to work is to invest their money in something which produces income to pay rent with - which they will have to pay tax on.

A new car is one of the fastest deprecating assets/ investments you can make.

I think the "new car and gifts for the family" bits were meant to be "you forgot to actually enjoy the money" rather than investment suggestions.
Though I agree that "gifts to the family", for the majority of lottery winners, are likely to be the worst kind of anti-investment. A £100k gift to a family member is likely to cost you £200k within a matter of months, and then so on and so forth until you cut your losses or all the money is gone. (Not a judgment on anyone's relatives, just the reality of how lottery wins work.) Hence my suggestion of investing in the one-way plane ticket.

Albermarle

unitedwestand said:

Albermarle said:

The market is very jittery at the moment

They have been a lot more 'jittery' in the past, and no doubt will be at several points in the future.

True, but protected fixed rate savings haven't been so. The gamble is against real returns and with rates at 14 year highs against inflation forecast to drop I think cash is once again a valid consideration. 

I am partly of the same opinion, that fixed savings rates now  could mean that safe savings could be running ahead of inflation over the next years ( maybe ) . However I do not think that is a good enough reason to go wholesale into cash at the expense of investments, which historically have proven to be a much better bet, albeit more volatile. 
Maybe though some tweaking of cash/investments mix and fixing savings for 3 years + may not be a bad idea.

eskbanker

unitedwestand said:

eskbanker said:

unitedwestand said:
The market is very jittery at the moment

Which market, and by what measure?

Equities/ Bonds. As long as you can fix above anticipated/ targeted inflation which you can just now and have your savings below the £85k protected limit cash is always the lowest risk investment to return. From Dec 21 to Oct 22 the s&p 500 fell 25% that's not low risk.

"Equities/ Bonds" aren't 'a market', they're asset classes. Was citing a 25% drop of one specific market during a period ending over six months ago meant to answer the question about quantifying 'very jittery at the moment'?

GenieBoy

Don't worry, if you won £1m on the Lottery, Camelot will put you in touch with a very good wealth management firm (who Rishi Sunak uses ) and they will ensure you have an income for life to meet all your desired expenditure.

No need to worry about inflation eroding your capital in some pish instant access account. 

Albermarle

Don't worry, if you won £1m on the Lottery, Camelot will put you in touch with a very good wealth management firm (who Rishi Sunak uses  ) and they will ensure you, and they,  have an income for life to meet all your desired expenditure and to buy them a nice Porsche

Small addition in bold .