Posted on by Damien Fahy
I have £150k to invest and I need to produce an income from this. My question is do I purchase a buy to let property? I have worked out after expenses and mortgage I would be left with £500 pcm which is more than the interest I am getting at the moment or do I try and buy a business which is already established for say £100k? My husband has in the past invested in bonds, shares, gold, spread betting but we have lost a lot of money. At present all our money is in the bank but the interest is very little and as we are semi retired we need something to keep us both busy but not sure which is the right way forward.
The first thing to do is to get independent financial advice as your wider personal and financial circumstances need to be taken into consideration before you do anything.
For help in finding the right financial adviser read my article 10 tips on how to find a good financial adviser
But obviously I want to give you an idea of what some of your options are. But before I do I question your motivation and your approach to investing. From what you have said you want to generate £500 a month (net I’m assuming – although rental income, as you suggest, would be taxable). So on a £150, 000 you would need to generate 4% after tax each year (or £6,000). Now this is not exactly shooting the lights out and is achievable without excess risk. Obviously anything above 4% would help boost your capital sum.
Are you truly investing for income?
Is income (and perhaps growing income) what you are concerned with and not access to capital? If so then you can afford to secure an income and not worry about what happens to the capital to a certain extent. (i.e if an investment portfolio pays consistent growing income for you to live on should fluctuations in the share prices overly concern you?)
Or are you after something to do with the money to occupy your minds? You talk about buying a business and living off the income it generates. If that is the case how is this different to buying an annuity? Businesses have a habit of sucking in extra capital you didn’t plan to spend but if you are walking into things with your eyes open then it’s your call. Just be clear what you are trying to achieve with your money as you won’t necessarily be able to do everything.
Think about the risks you are taking
You seem risk averse as you mention your husband’s losses but your investment strategy to date (and your suggestions for the future) are all punts on a single asset class, be it gold, spread betting or buy-to lets. The problem is that your income stream and portfolio become overexposed to the fortunes of one asset. Should that market bomb (a company’s shares fall or the price of a property you own tumbles) you won’t have a lot of time to recoup any losses given your age.
So what might you consider investing in?
As promised I said I’d run through some of the options open to you:
On the assumption that you are looking to make income from your investment then buy-to-let is one option. As a nation we are obsessed with home ownership and as a result property is often seen as a safe investment. How many times have you heard the phrase as safe as houses or been told to invest in property?
Property returns do tend to be uncorrelated to investment markets but they are not without risk. Over the long term house prices have tended to beat inflation (around 2.8% above inflation per annum since 1960) but the housing market like investment markets experiences periodic price corrections and crashes.
For a buy-to-let investor concerned with rental income, the average UK property yield is around 6-7% but there are massive regional variations. Buy-to-let shouldn’t be entered into lightly as property is an illiquid investment and there are often large initial capital outlays.
My guide to buy-to-let covers all the factors you should consider including costs, likely returns and whether it is a good investment.
Although a lot of people think of cash as the starting place when looking to invest it can be the eventual destination.
With inflation in excess of most savings account rates the real value of money on deposit can be quickly eroded. With the withdrawal of the National Savings and Investments (NS&I) Index Linked Saving Certificates savers have been struggling to find an alternative.
But one word of warning. Theses bonds will either restrict access to your capital during the term of the bond or impose penalties if you wish to withdraw your money early.
Also if you do decide to put your money into a savings account then you may wish to limit the amount held with any financial institution to £85,000 (or £170,000 on a joint account). This will ensure your savings are covered by the Financial Services Compensation Scheme should your chosen bank go bust. For more details read my article ‘How to protect your savings from your bank going bust’. Of course, National Savings and Investment bank accounts are 100% back by the Government so represent no investment risk. Unsurprisingly the returns from these products are not the most competitive.
It is possible to invest directly in shares and hopefully receive and income stream via regular dividend payments along with a bit of capital appreciation (for which you can use your annual capital gains tax allowance to receive receive tax- free, or at least in part) . Well that’s the theory. Direct equity holdings carry much higher investment risk and hopefully rewards. The problem is that if you get your timing or research wrong you can swiftly find yourself sitting on a huge loss and no income stream. (that’s exactly what happened to people who invested in banks in 2008). According to the Barclays Equity Gilt Study equities have produced an annual return of around 5.4% over the last 50 years but this does mask huge crashes and market rallies.
Corporate bonds are essentially loans to companies paying you an interest payment (a coupon) and your original loan amount back at an agreed date. The riskier the company the more likely they are to default, so the greater you potential return by way of compensation. But as ever with greater risk comes the potential for greater loss.
At the safest end of the spectrum we have Gilts (which are loans to the UK Government) through to investment grade bonds (companies with good credit ratings) through to non-investment grade and high-yield bonds (loans to companies with poorer credit ratings). Like equities it is possible to hold bonds directly and a number of companies (such as Tesco) have even marketed their bonds directly to the public.
Bonds are deemed lower risk than equities and their typical annual return over 19 years has been around 2.5%. But as ever past performance is no guide to future returns.
The above are just a few of the main investment asset classes. There are others such as commodities and hedge funds but I don’t wish to bamboozle you. The main point being you have a wide choice of assets which can produce income.
But up until this point I have talked about holding assets directly. However, most people invest via an investment wrapper into a number of investment funds, which in turn invest in a range of assets.
When you invest, two things to consider are ‘how’ you invest and ‘what’ you invest in. The ‘how’ is whether you invest via pension, investment bonds, collectives etc. While the ‘what’ is usually the underlying investment itself, such as equities, bonds, property etc.
Without trying to oversimplify investment but think of it like a car. In order to get from A to B (ie your current situation to your desired stage in life) you need to choose a car. The car that best suits you will depend on the journey you plan to take, your current budget etc. Every car will have different running costs, tax etc and not one car suits all. Think of this as the investment wrapper (pension, Stock and Shares ISA etc). Once you have chosen a car you need to put petrol in it to get you to your desired destination. This is akin to the underlying investment choices. Clearly the petrol drives performance but the car can enhance it. But obviously it’s no good buying a Ferrari if all you plan on doing is going to the shops and back each day. It’s a similar thing with investment – excessive costs can wipe out any benefit. A good financial adviser can help you make the investment decision that suits you and your plans.
Building a Portfolio
If you simply want income and no access to capital then it is possible to buy an annuity which will provide you with a guaranteed income stream. The level of income will depend on your age, sex and possibly health but once purchased you lose all access to the capital.
As I’ve said seek financial advice as an adviser will be able to advise you on the best thing to do with the £150,000 which may not even be to invest it, once your wider circumstances have been taken into account.
I hope that helps.