How can I earn a good income from a £120,000 life insurance payout?

11 July 2013

Q

My husband passed away recently and his work life insurance policy paid out £120,000. I am in my thirties and would like to generate an income from this. The people I saw at the bank suggest I put this into a stocks and shares ISA but I have asked them to hold back because I don't want to lose this money as I need it to live off. I have a cash ISA and have already paid my mortgage off with savings. But my house is old and will need work on it and the life insurance money will be my only income for a while. Any suggestions as to how I can achieve a decent income from the £120,000?
From
SE/Chepstow

A

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The best approach for you will depend upon how much income you need, over how long and the risk you are prepared to take.

However, if you want complete capital security in absolute terms, then you'll need to invest in cash. The top current cash rates are paying around 2.5% a year before tax, only providing you with an income of around £3,000 each year; although this would be tax-free, if you remain a non-taxpayer, otherwise you will be subject to tax on this interest apart from the amounts you are able to invest in a cash ISA each year.

Also the value of your underlying capital would be reducing in real terms after inflation is taken into account. If you are happy to accept some form of investment risk and are prepared to invest for the longer term, you could establish a relatively cautious portfolio consisting of fixed interest, shares and property, which might provide you with an income of around 5% a year.

This would pay you an annual income of about £6,000, although again there is a danger that your money will lose value in real terms unless the return on your investments is enough to pay your income and match inflation.

You also say that you will need to do some work on your house. Whatever money you might need for this should be kept in accessible cash accounts and, of course, any money you spend will reduce the amount left to provide you with an income.

If you need a higher level of income, then you may need to be prepared to take more risk but you should first seek more specific independent financial advice.

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