Most of us have some money worries. A niggling question. Something to sort out. But we don't all have the time or the money to see a financial adviser. Boring Money has gathered together some Financial Wizards to tackle your questions. Ask away...
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My mother is 84 and has around £35,000 in cash, realised when she moved to a smaller house. She would like to invest it and draw income that would be slightly higher than the natural yield - say around £2,000. What is the best vehicle for that please?
Ed , SXE
18 September 2017
£2,000 a year is just under 6% and higher than the income which could be taken from a stock market investment (typically around 3.5%) and higher than most other types of investment such as corporate bond funds. This means that your mother will be spending some of her capital each year. This may not be a problem, however if invested, spending capital could increase the rate at which the money might run out if the stock markets are unkind to you – if you spend capital when markets are rising there is no problem, however if you spend capital when markets fall, your investments have toi grow much faster to get back to where they were and you can easily be in a position where they fail to recover.
You also need to take into account inflation and the need to potentially draw more money in the future: £2,000 this year will have the spending power of around £1,600 in 10 years time.
Therefore we should assume that each year the income needed is going to rise by 2%, from £2,000 this year to £2,400 in 10 years time.
So let’s look at 2 potential options:
- Hold in cash: interest rates are poor but limping upward. If we assume an optimistic average interest rate of 2%, the money runs out after 17 years. This may be perfectly satisfactory and the advantage of this strategy is there is no stock market risk and being in cash there is lots of flexibility to make further withdrawals if needed
-Invest in the stock market: If we assume a conservative average 4% return each year after charges, after 20 years there is still £6,000 left.
My preference would be a combination of these. Hold some money in cash for flexibility and to pay the first couple of years income, and invest the balance in either a low cost FTSE All Share Tracker, or a combination of equity income funds. Use a combination of cash ISA and stocks and shares ISA to eliminate any tax issues, sheltering the whole £35,000 over 2 tax years (the ISA allowance is £20,000 a year).
- £10,000 in cash, £25,000 in the stockmarket which would mean the money would last around 19 years, assuming the markets are kind to you.
Of course this is just looking at this money in isolation and there could be other, better options.
I have just sold my house and have a significant sum of money I want to invest. I may want to draw some income but also want to achieve capital growth. Are there funds that aim to achieve both or should I just invest for growth and draw money as I need to for income ?
Jon darlison, SRY
13 September 2017
Investing for both income and capital growth is possible (advisers call it investing for total return) but usually requires some compromise. If you go all-out for income, you are likely to limit the growth of the portfolio, whereas going all-out for growth will likely lead to a lower income being generated.
But that's OK! The best place to start is to define what you need out of this investment. If income is the priority, how much do you need, how long for, and when does it need to start? Begin with your goals and work from there to build a portfolio that aims to achieve those goals.
It's important to consider both the level of income and the capital value of the money. For example, if you need a higher level of income than the portfolio is likely to generate, you may need to dip into the capital. If you do this, how long will the capital last? What happens if you need to draw down from the capital when markets are dropping in value?
I suggest that you keep up to a couple of years' income in a risk-free bank or building society account, and give the portfolio chance to begin producing the income and capital growth you need. This will place a buffer between your income needs and a market decline, and enable you not to have to touch the portfolio if it is temporarily looking a bit sick. This might all seem a bit complicated, but with a bit of research it is possible for anyone.
Finally, there are funds which aim to do all of this for you (except for the cash buffer part). Look for funds with names that include the word 'income', but make sure that they include a spread of different kinds of assets and that the money is spread around the world, rather than just in the UK.
If in doubt, seek advice from a good financial planner, who will be able to help with both the cashflow planning part and the portfolio construction.
Please help me . Choosing a pension from Aviva . It asks if I want growth or income ? Which one do I choose ? I'm 46 .
Ria, Greater London
11 September 2017
We obviously invest to make money. And hope for better returns than cash. The money we make can either be paid out to us as income or represent itself as growth.
Here’s a basic analogy. Imagine your pension is like a bag of Minstrels. Every year you get given an extra Minstrel. You can choose whether to eat it there and then or whether to pop it back into the bag and stockpile more Minstrels.
It’s the same with your investments. When companies you invest in make a profit, they can either re-invest that cash in making themselves bigger and better, they can stockpile it in the bank or they can give a bit back to their shareholders. Any cash they pay out to shareholders is called a dividend. This is like some income for you. You can either choose to take that cash when it’s offered, or re-invest it and buy more shares with it. Foregoing the cash today for a bigger pile of shares. And that’s the difference between investment for income and investing for growth.
As an example, £1,000 in the UK stockmarket might pay you an income of about £20-£30 a year. Growth investors will choose to ‘re-invest’ this and increase the number of shares held. Which they hope will go up in value too.
If you could use some income to boost a salary or a pension, for example, you will probably want the income option. If you’re saving for something like pension which is at least a decade away, it probably makes sense to grow your stash and consider any ‘growth’ option to boost your savings.