You advised me last year about the tax payable when we sell our flat. We now have around £100,000 to invest. As we are both in our 70s, we need some monthly income to top up our pensions. What would you suggest?
Phil, West Sussex (sent via email)
Take a look at the top of the savings tables and you’ll feel thoroughly depressed. With the Bank of England base rate at a record low of 0.1%, cash savings rates are woeful, particularly for those looking for a monthly income.
The best easy-access savings account pays 0.5% AER, giving you a £41 income top up each month. Lock your money up for five years in a fixed-rate account and you’ll be offered 1.25% AER each year, giving you just over £100 a month. Rates are similarly woeful in tax-efficient cash Isas.
First off – I won’t be making any investment recommendations, more talking about the principles of what you need to consider. With such a significant sum, I would strongly suggest engaging with a regulated financial adviser, who can understand your goals and recommend a suitable investment strategy. The Money Advice Service, a government-backed organisation designed to help people understand their finances, runs a directory of regulated advisers. Visit directory.moneyadviceservice.org.uk to find out more.
Costs will vary – some advisers charge fixed fees, some charge hourly fees, others charge you as a percentage of your assets. You’ll usually encounter an upfront fee and, if you decide to go ahead with them, an annual fee to get a yearly review of your investments.
Back in 2018, Which? surveyed hundreds of independent financial advisers to find out how much they would charge to set up a £100,000 investment portfolio. The average cost was around £1,800, though the highest quote we were provided was £4,000. You can often have a free initial meeting with an adviser, and should get an idea of what they will offer and how much they will charge – so I would suggest conducting a number of these meetings.
Let’s go back to cash. Although the rates at the moment are truly dreadful, there’s one major advantage – you’re not taking any ‘capital risk’ with your savings. Although you won’t earn much interest, you won’t lose your lump sum. However, you face other risks to your savings – such as inflation risk (prices rise faster than the return you are getting, meaning you can buy less with your money); or ‘shortfall risk’ (your money doesn’t grow to the level that will allow you to meet your financial goals.
But to get better returns, you’ll need to consider a range of other investments that could deliver a better return, but come with the risk of losses. These include assets like corporate bonds and gilts, stocks and shares and property. You’ll want a mix of assets, to diversify your portfolio, meaning if one asset drops in value, losses are cushioned by holding your funds in other, unconnected assets.
But understanding what you want to achieve with your lump sum is critical to directing your investing strategy. For example, if there’s a certain level of return you need to top up your income to a comfortable level, you may need to invest in assets that pose more risk, but pay better returns. You’ll need to be comfortable with this risk.
One approach investors take to generate an income in retirement is to take a ‘natural income’ from their investments, which involves buying assets that pay an income such as shares, which pay dividends, and corporate bonds, which pay interest. This would, in theory, allow you to keep your savings untouched, simply allowing you to cream off the income on a monthly basis. There would likely be a ceiling on how much income you could earn, however.
If you need more income than is produced naturally by your portfolio, the alternative approach is known as ‘selling down’. This involves selling your portfolio gradually over time. The downside of this is that eventually you could exhaust your savings – particularly if you take too much income too soon, or you suffer a dramatic fall in your portfolio while drawing an income.
In conclusion, spend some time understanding the concepts and then have a chat with a financial adviser. Hopefully you’ll build a portfolio that can help get you a healthy income and give you peace of mind.
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