Best vehicle for investing around £35,000?
18 September 2017
Question by Ed
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?
Answered by Boring Money
£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.