Investing for income: a golden age?

If you rely on investing for income – as opposed to work – you’re rather spoiled for choice. In many cases, shares, bonds, annuities, property and even humble cash rates look pretty good. Compared to an inflation rate of 3.5%, we may even be in a golden age. That said, it’s important to be careful what you buy and what you buy it for.

The slow slide

We must all move from saving to spending at some point.

Retirement isn’t what it used to be: The last commute, the final day, prosecco on the mid-morning breath, disingenuous ‘good luck’ cards … they seem like relics of the past.

Now we move in phases: Consultancy or non-executive roles, perhaps even one as chair, and the luxury of blending paid and voluntary work. Active minds must ease themselves out gently.

As your income from employment falls, you need to dial up saving and investing for income. So, how do you get the right income from them all?

A guaranteed income?

Much of your wealth will be in your pension. Here, you have three options.

You can take the lot, or some of it, straight away. Whatever lump sums you withdraw, 25% of the whole pot will be available tax free. That’s £250,000 from a £1 million pension – with the other £750,000 subject to income tax.

If you withdraw in increments, what financial planners call a drawdown, your money is also subject to the same rules.

This is partly why many people – nearly 90,000 last year – bought an annuity from an insurance company. This is a financial product that guarantees you an income for life.

Their rates are based on interest rates. At current, these are 4.5% (you can find the latest from the Bank of England’s website here).

That’s not bad, especially compared to history. Imagine buying an annuity in those years when rates were at or close to zero!

Annuities are the tutti frutti of financial products. There are loads of types: level, enhanced, index-linked, the list goes on – and they have this strange ability to bamboozle the best. That’s why we’re here, to offer clarity and advice.

Intersections of investing for income

Let’s lay products aside for a moment and look at the investments that go into them.

Two of the main income-paying investments are:

• Shares, through dividends. These often pay more, as they’re riskier and you could, theoretically, lose your shirt.
• Bonds, through yields. Income is often lower because bonds are supposed to be safer.

So, get this:

• The FTSE100 index pays an aggregated income of 42%.
• A British Government 10-year bond pays 52%.

Again, these numbers are at time of writing – the links will take you to the latest values – but it’s clear the safer investment currently pays more.

Bonkers isn’t it. We’ve covered whether UK shares are in the doldrums before. It’s a complex picture of course. And the beauty of investing is that you can always find exceptions to the rule.

For example…

You may want to focus on shares with a good track record of growing their dividend. This is a company’s management team having a demonstrable strategy for rewarding shareholders. Such shares are called dividend achievers, or kings, or aristocrats … you get the picture.

If you want to get geeky, there’s a handy resource called the S&P UK High Yield Dividend Aristocrats Index. At time of writing, it told us the 3-year price return was 1.76% and the total return was 5.96% … which is an income component of 4.2%.

Buildings and building societies

Everyone needs ready cash. It can cover unexpected, short-term costs. You need this safety net in your spending phase just as much as in your savings phase.

These days you can get as much as 5% for a cash ISA – which shields the money from tax. Outside of an ISA you could get even more, though terms and conditions always apply.

National Savings and Investment products, which are another way of lending to the UK Government, in essence, pay a little less: around 3-4%.

And, lastly, at the opposite end of the liquidity spectrum, you may well have a rental property. Many of our clients do. The average UK rental yield should be in the region of 6.7%. That’s a handy diversifier from shares, bonds, cash and all the rest of it.

So, there you have it, multiple ways of generating an income and plenty of ways to diversify your sources of income.

If we can help turn your savings into an income that covers what you need and what you want, please get in touch. We’d be delighted to help. You can reach us on hello@firstwealth.co.uk and 020 7467 2700.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.