A married couple aged 61 and 65, who are basic-rate taxpayers with a
cautious to moderate approach to risk, are looking to generate a reasonable
level of income from their life's savings of £100,000. How should they
go about this?
Against a backdrop of tumbling stockmarkets, most income investors prefer
to sit on their hands and do nothing. But with interest rates at a 40-year
low, anyone getting more than 3 per cent net from their savings account is
firmly in the minority.
To make matters worse, given the likelihood that this money will need to
work for them for the next 30 years, even low average inflation of just 2
per cent a year would nearly halve its real value over 30 years.
Nonetheless, cash is the buffer that will protect investors when markets
fall, so I would suggest this couple keep £25,000 liquid.
Competitive interest rate consistency is key, so I would use Scottish
Widows Bank, which currently pays 4.15 per cent gross a year on a balance
After April, the couple will have the option to use some of this money for
next year's Isa allowance but, in the meantime, it will help ease them into
From April 2004, shares lose one of their tax benefits from being in an
Isa, so their £14,000 allowance should go into corporate bond funds.
The Threadneedle strategic bond and Aegon optimum income Isas both search
for an investment “sweet spot” by holding a spread of investmentand
non-investment-grade bonds and should deliver tax-free income of around 7.5
per cent a year.
This will help provide the clients with a reasonable inflation-beating
income over the long term.
The sum of £20,000 should go into a with-profits bond, where returns
are smoothed and can be drawn as income or rolled up for growth.
After heavy stockmarket falls, there is speculation that any recovery will
find its way to the pockets of the life office rather than the investor.
However, the Prudential with-profits bond has an asset mix of roughly 50
per cent shares and the rest mainly in bonds and property, so it will have
avoided many of the falls and will be well placed going forward. An income
of 4 per cent net a year is a reasonable starting point.
If the value of their home and other assets will push them over the
£250,000 inheritance tax threshold, then insurance bonds, such as
with-profits, can also be useful for effective tax planning.
Distribution funds offer a mix of bonds and shares, which helps reduce risk
but provides prospects for rising income and some growth, so a further
£20,000 should be invested here.
If inheritance tax planning is important, then the Axa distribution bond
would be a good choice. If it is not, then the Jupiter distribution unit
trust would be preferable as any gains will accrue to their capital gains
tax allowance, providing greater tax-efficiency.
Equity income funds look ideally placed to take advantage of some of the
sky-high dividends currently on offer so I would recommend placing
£5,000 into Credit Suisse income and £5,000 into New Star higher
With the final £11,000, I would recommend the NDF selector income
& growth plan 2, option 2. This would provide a 6 per cent income for
four years and full return of capital provided the FTSE 100 never falls by
more than 50 per cent or is no lower at the end of the term than it was at
the start. There is the potential for loss of some capital if these
barriers are breached but the plan is a good way of paying an attractive
income in a flat market.
Overall, this gives the couple lots of liquidity, an overall net income of
about £4,500 a year – well in excess of a savings account – and
excellent prospects for this to rise in future years as their investments
increase in value.