A couple in their 50s want to use an inheritance to produce a healthy income, while avoiding risk
My partner and I have inherited £200,000 and we would like to invest it to generate a monthly income. I’m happy to tie it up
in the short term but, what with all the uncertainty around Brexit, I don’t want to take more risk than is necessary. What are my options?
Using a windfall to generate a monthly income is a great way to get extra value from it and there are several different ways to achieve this.
Key to your choice will be balancing the return you want with the risk you’re prepared to take. In today’s ultra-low interest rate environment, minimising risk can be a challenge.
What’s more, as you are only in your fifties, a likely investment horizon of 25 years plus means you have the time to ride out the ups and downs of the stock market.
However, while investing offers the potential for higher returns, if leaving your money in savings generates sufficient monthly income, it may not be necessary to take the additional risk.
One option is to stick with savings accounts. Your balance is guaranteed not to fall, as long as you don’t fall foul of any Ts&Cs – closing the account early, for example. However, be mindful of the Financial Services Compensation Scheme (FSCS) limit.
This scheme protects your cash if your bank or building society goes bust, but only up to £85,000 per person, per banking licence.
Anna Bowes, co-founder of Savings Champion, explains: “You would need to open three accounts (two if you are looking to put it into joint names).” She adds: “You might not need to split it immediately, though, as it will be protected by the UK FSCS Temporary High Balance cover, giving up to £1 million worth of protection per provider for six months from when you receive the funds.”
She suggests splitting it between three fixed-term accounts – £67,000 in each of the Metro Bank 18 Month Fixed Term Savings Account, paying 1.93% monthly gross and the First Save 2 Year Bond – 22nd issue, paying 1.99% gross monthly, and the remaining £66,000 in the Hodge Bank 3 Year Fixed Rate Account, paying 2.08%.
“This would earn a blended rate of around 2%, so £4,000 gross a year,” she adds. “That’s around £333 a month.”
Keeping your money in savings accounts is low risk but you will be hostage to interest rates.
“Remaining in cash when interest rates are so low means that capital is being eroded by inflation,” warns Helen Richardson, an IFA with Ascot Lloyd.
“If you are prepared to take a longer-term view of at least six years, I would recommend a managed investment service where risk is controlled in line with your appetite. This should generate superior returns to cash.”
Investing can be a bit like a rollercoaster ride, with the value of your money rising and falling unexpectedly. Fortunately, there are ways to minimise the risks associated with this bumpy ride.
John Moore, senior investment manager at Brewin Dolphin, explains: “Leave the first year’s income in cash so that the remaining capital can be invested without any timing issues. It’s also sensible to have a balanced investment and asset allocation approach so you can call upon the best performing asset when withdrawing income.”
These strategies reduce the risk of having to take income when the value of an investment has fallen.
There are additional ways to improve the health of your money, with Ms Richardson suggesting you use a pension wrapper where possible.
“Pensions are incredibly tax-efficient and your investment will be uplifted by at least 20% tax relief, effectively turning an £8,000 contribution into £10,000,” she explains.
You would need to be mindful of the contribution limits – the greater of your annual earnings, or £3,600 – but she also points out that carry forward can be used to mop up unused relief from the previous three tax years.
Although your main goal is to earn an income, you’d also like to leave as much of it as possible to your family.
Mr Moore recommends putting a small amount into higher-risk investments.
“These would benefit from a very long-term approach,” he adds. “Using a regular savings scheme for this would enable you to use pound cost averaging [buying a little regularly rather than all at once] to reduce volatility.”
Remember to monitor your returns regularly against the wider market to ensure the income your windfall generates remains in the best of health.
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