“I want to invest a windfall for retirement income”

22 August 2017

The Investment Doctor helps a reader with an inheritance to invest.

I’m a 63-year-old female and have inherited £60,000 from my aunt. I want to invest this to supplement my income in retirement. I have some income from my teachers’ pension and will receive my state pension in 2019. I am cautious about investing as I have never invested before. What do you recommend?

Initial diagnosis

This is an ideal time to review your plans and pay off any debts, says Danny Cox, a chartered financial planner at Hargreaves Lansdown. “When you retire, you should have no debts and a minimum of £10,000 in cash as an emergency fund,” he says. “Cash individual savings accounts (Isas) work well here as the interest is tax-free.”

You should also consider how much pension income you will need. “Unless you decide to change your lifestyle or move abroad, your basic spending needs – such as running your home – are unlikely to change,” he adds.

If income is your main goal, you should also review any options to top up your teachers’ or state pension. “Guaranteed index-linked income is the gold standard, so if you have the option to ‘buy’ more entitlement this is worth considering,” adds Mr Cox.

Treatment plan

Justin Modray, founder of Candid Financial Advice, says the important rule is not to invest what you can’t afford to lose. “Provided you invest sensibly, there’s a very good chance you’ll make better returns than cash over five to 10 years, but stock markets are volatile and there are no guarantees,” he warns.

Once you know how much you plan to invest, consider combining assets that behave differently from each other to smooth returns over time. “This would include various stock markets around the world, corporate bonds, commercial property and absolute return-style investments,” he says.

If you are nervous about investing a lump sum right away, consider drip-feeding it in every month and use your Isa allowance – income paid out of Isa investments is tax free.

“You can invest £20,000 within an Isa this tax year and move any money invested outside an Isa across in future tax years,” adds Mr Modray. So if you’ve put £10,000 into a Cash Isa, you can put another £10,000 into a Stocks and Shares Isa this tax year.

Your likely prognosis

There is a high probability that you will still be alive in 25 years’ time and that’s a long time to invest cautiously, points out Dennis Hall, founder of Yellowtail Financial Planning.

“If income (and some capital growth) is desired over that time frame, I’d be investing in something that looked like a balanced fund with income distributions,” he says.

He suggests a mixture of global equities and global bonds – probably split 60/40 – with income distributions. “A single fund would probably suffice, with a small amount held back to meet any short-term liquidity, so £10,000 in cash and £50,000 in a balanced fund would be a simple solution,” he adds.

A broad treatment

If you’re happy with the ups and downs of the stock market and to take a longer-term view, consider investing in an equity income fund, says Mr Cox. “It will provide a regular income, which will grow as your capital grows,” he says.

“For every £10,000 of capital you invest, you can expect an income of around £350 a year. My recommendation would be to spread your investment across a range of high-quality equity income funds – for example, CF Woodford Equity Income*, Marlborough Multi Cap Income, and JO Hambro UK Equity Income – for diversification purposes,” he adds.

Investment platforms are also useful, points out Mr Modray. “These allow you to mix and match funds in one account, which is very convenient and usually cheaper than buying direct from fund managers,” he says.

For investors with £50,000-plus to invest, Interactive Investor’s platform (Moneywise’s parent company) is good value as it has a fl at £80 yearly platform charge, which includes two free trades per quarter. Visit Ii.co.uk and www. moneywise.co.uk/best-platforms to fi nd out more.

*CF Woodford Equity Income is a member of the Moneywise First 50 Funds for Beginners. For more income fund ideas, visit Moneywise's FIrst 50 Funds for Beginners.

Do you have a question for the Investment Doctor? email editor@moneywise.co.uk.

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