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I'm 90 and investing for income!

11 July, 2017

The dilemma of a 90 year old person generating an income to pay for care fees at a time when interest rates are at all time lows.

Everyone knows the basic rules of money management and investing – as you get older you take less and less risk. Whereas in your youth, you might have been willing to have a little flutter on the stock market, in your later years you tend to be ready to pop on your comfortable shoes and buy something nice and safe. Right?

Wrong. If a piece in the Times ( from 2016 is to be believed, nonagenarians are doing it for themselves. Mark Dampier of Hargreaves Lansdown wrote about how his 91-year old mother is handling the dilemma of generating an income to pay for care fees at a time when interest rates are at all time lows.

In April 2016, the FCA published data ( the lowest interest rates offered by 32 providers of easy access cash savings accounts and easy access cash ISAs. The idea is to shame providers into offering better rates, but with the UK rate at just 0.25%, it probably isn’t going to go a lot higher. Also, shamed or not, there’s a lot of providers out there offering rubbish rates.

Mark’s Mum has sold her house, giving her a pot of £400,000 with which to generate an income. In a normal world, she’d just stick this in a savings account, but this would get her a measly £4,000 at today’s interest rates. She could buy an annuity, but that would mean using up all the capital to buy an income that might only be needed for a few years. Equally, it would mean she couldn’t leave anything to her family.

Mark, who knows a thing or two about stock markets, pointed out that his mother can get somewhere between 3-5% in an equity income fund – or an income of £12,000 to £20,000. For the record, he recommended a blend of Marlborough Multi-Cap Income, JO Hambro UK Equity Income, Woodford Equity Income, Jupiter Asian Income and the Edinburgh Investment Trust.

Presumably Mark likes his Mum, so he’s got her best interests at heart. For all those who would wave their hands about and say ‘but the stock market is so risky, what if this poor lady is left destitute’, Mark points out that the income on equity income funds doesn’t vary very much, and given that his Mum is unlikely to need the capital, she can – for the most part – afford to ignore it.

Research by Hargreaves shows that while income from a £10,000 cash deposit has fallen by 86% since 1996, dividend income from a popular equity income fund has remained steady. When an investor factors in the growth in the capital value (which in turn grows the dividends) the income has increased by 268% (and the capital increased to £39,930).

The potential to generate a higher income remains one of the strongest arguments for investing in the stock market. It is much more important than trying to get-rich-quick with some punchy oil stock. It remains one of the very few ways to generate an income from your savings.