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How can I get an income of £12,000-£15,000 a year from my investments?

This investor wants an income of £12,000-£15,000 a year from her investments
September 10, 2021 and Rebecca Williams
  • This investor wants to supplement her pension income with £12,000-£15,000 a year
  • She could use her funds to buy an annuity but might not have enough to buy this level of income
  • Drawing from her investments could generate this amount but they could run out before she dies
Reader Portfolio
Marion 69
Description

Pensions invested in shares and funds, cash, residential property.

Objectives

Take £12,000-£15,000 a year from investments to supplement income, 5% a year return from investments, decide whether to transfer personal pension into Sipp, 

Portfolio type
Managing pension drawdown

Marion is 69 and retired. She receives state pension of £15,000 a year and an occupational pension of £500 a year after tax. She has three adult children. Marion’s home is worth around £725,000 and mortgage-free.

“My pension income of £15,500 a year isn’t enough,” says Marion. “I would like to draw £12,000-£15,000 a year before tax from my investments to supplement my income. But if that is not sustainable I would be happy to sell holdings to fund this level of income.

“I am in drawdown and, since I retired in November 2019, I have taken a lump sum of £65,923 to pay off my mortgage and £15,000 to supplement my pension income. I would like my investments to make a return of 5 per cent a year, if possible. But I don’t think that my pension pots are invested appropriately.

“I have had a pension – my former workplace money-purchase scheme – for 20 years and a self-invested personal pension (Sipp) since 2019. The former workplace pension, now a personal pension, is invested in three funds chosen by the provider, Standard Life, after I went into drawdown and is worth about £216,000. I wondered whether to transfer this into my Sipp?

“I’d say I have a moderate tolerance for risk, although my investment strategy is ‘scatter gun’ rather than anything sustainable in the long term. If I read about something interesting I might have a punt but I should be more strategic with my personal pension. That said, Sipp investments chosen according to this approach include Rathbone Global Opportunities (GB00B7FQLN12) which has been very successful so far. But Beyond Meat (US:BYND) – a recent purchase – has been fairly disastrous, although it is not the end of the world as I didn’t buy much of it.

“Other recent transactions include buying VT AJ Bell Responsible Growth (GB00BN0S2V92) and selling City of London Investment Group (CLIG).

“I am now thinking of putting money into investments that offer global opportunities and tracker funds with a good reputation.

“If I go into residential care at some point in the future, my children will sell my house to fund it. I don't want to do equity release. I also don’t intend to give money to my children during my lifetime as they are financially comfortable.”

 

Marion's total portfolio
HoldingValue (£)% of the portfolio
Standard Life Active Retirement 3 Pension Fund155,77448.18
Standard Life Active Retirement 2 Pension Fund43,60313.49
Standard Life Active Retirement 1 Pension Fund16,6655.15
Rathbone Global Opportunities (GB00B7FQLN12)14,4104.46
Vanguard LifeStrategy 60% Equity (GB00B3TYHH97)12,2513.79
Cash12,0173.72
NS&I Premium Bonds12,0003.71
VT AJ Bell Balanced (GB00BYW8RX12)10,7013.31
Renewables Infrastructure Group (TRIG)10,4943.25
Legal & General UK Index (GB00B0CNGN12)10,1513.14
Royal London FTSE 350 Tracker (GB00B523MH29)9,9633.08
Vanguard U.S. Equity Index (GB00B5B71Q71)7,6092.35
VT AJ Bell Responsible Growth (GB00BN0S2V92)3,2921.02
AJ Bell (AJB)2,6960.83
Rathbone Ethical Bond (GB00B77DQT14)1,1550.36
Beyond Meat (US:BYND)5470.17
Total323,329 

 

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR'S CIRCUMSTANCES.

 

Eilidh Anderson, investment manager at Kingswood, says:

Your desire for an income of £12,000-£15,000 a year from assets of £323,329 represents a target yield of 3.7 to 4.6 per cent. To put this into perspective, the yield of the FTSE 100 index at the end of August was 3.28 per cent.

Bonds no longer provide the same level of income or protection as they have historically, meaning that you will need a higher exposure to equities to meet your income requirements and target return of 5 per cent. Since equities are riskier than bonds, this may be too volatile for someone like yourself who is in retirement and requires a steady income. For example, if we had another market shock similar to the Covid-19 correction last March, your investments could fall 20 to 30 per cent.

You have picked some good funds for your Sipp but would benefit from some strategic asset allocation. 

Although you take a ‘scattergun’ approach, you are quite well-diversified. MSCI PIMFA Private Investor Income Index is a benchmark representing the typical investment strategy of an investor who seeks an income from their investments. Your portfolio is not too dissimilar [see charts]. Relative to this index, you are 5 per cent overweight fixed income and nearly 5 per cent underweight alternatives and more tilted internationally than to the UK.

A way to invest more strategically would be to continue holding quality active funds or exchange traded funds (ETFs) as the base of your portfolio and international exposure. And invest a small portion in direct equity holdings. Given your desire for a yield, you should be looking for companies with a high dividend yield and good dividend cover.

You could increase your weighting to Asia, Japan and emerging markets to achieve a more globally diversified portfolio with a lower correlation to western equities. These markets are more inefficient so offer additional opportunities for alpha (outperformance of the market) and usually have cheaper valuations and better long-term growth prospects.

It is important to pay attention to the level of charges you are paying both to investment providers and for funds that you own, as these affect your ability to generate compounded returns over time. For example, Standard Life Active Retirement 3 Pension Fund has its own charge and invests in SL ASI MyFolio Managed III Pension Fund (GB00B43XTH38) which also has a charge. That fund invests in more than 35 other funds, each with their own charges, the majority of which are run by Aberdeen Standard Investments.

Funds of funds are expensive to run and, in this case, you have three layers of charges, excluding any other fees for your pension trustee or platform provider. It could be worth having your pensions formally reviewed by a financial planner who could check whether there are any terms or conditions that prevent you from moving these assets into your Sipp. 

You Sipp, by contrast, has an underlying fund cost of 0.4 per cent, and your use of tracker funds and direct equity holdings has helped to keep ongoing costs down.

A financial planner would also be able to help with other planning, in particular inheritance tax (IHT). Your pensions are outside your estate for IHT purposes, but even after your nil rate-band of £325,000 and residential nil-rate band of £175,000, a sizable proportion of your wealth – £225,000 – is still exposed to IHT of 40 per cent.

 

Rebecca Williams, head of wealth planning at Brown Shipley, says:

You wish to supplement your pension income with an additional £12,000-£15,000 a year. First of all, review your monthly expenses and get an idea of how much income you need for essential expenditure and how much you additionally spend on items such as leisure, eating out and holidays. Also include any planned spending such as buying a new car or home improvements.

When you have clarified your expenditure, discuss with an independent financial adviser (IFA) whether to buy an annuity. This would be to ensure that, as a minimum, your essential spending is covered by secure income – your existing pensions and an annuity.

An annuity would provide a secure income for the rest of your life in exchange for a capital sum from your pension. Despite falls in annuity rates, they are still a key part of any discussion on retirement income. An annuity would mean sufficient secure income to meet all your essential spending without ongoing investment risk – irrespective of falls in investment markets.

And you choose the level of annuity income you buy. For instance, you could buy an annuity that, together with your pensions income, just covers your essential spending.

As an example, if you require a further £8,000 after tax each year to help cover essential spending, an annuity that would provide this level of income would cost £191,000. This is assuming that you don't smoke, are in good health and buy an annuity that pays out £10,000 a year, leaving you with £8,000 after tax. 

But the income from this type of annuity doesn’t increase so will lose its purchasing power over time. An annuity that initially pays a net income of £8,000 a year and increases 3 per cent each year would cost £277,000.

But you would have to cash in almost all of your pension funds, which are worth about £300,000 in total, to buy a secure annual income of £8,000 that increases 3 per cent each year. And you want between £12,000 and £15,000 extra income each year. Annuity income is also fixed so you couldn't change the amount you receive if your spending patterns change. Spending tends to decline later in retirement as we get less active.

The alternative is to remain invested and draw the income you require from your pensions. This approach would allow you to draw money in a way that suits your circumstances. And as your pensions would remain invested, they could benefit from rising markets. 

A cash flow model suggests that if you remain invested and your pensions grow 5 per cent each year, after all costs and charges, they could generate an annual income of approximately £15,000 after tax until you are age 89, after which they would run out. This assumes a consistent 5 per cent a year return. But with a 3 per cent a year return, your pensions would run out after you reach age 85. Average life expectancy for a 69-year-old female is 88, with a one-in-four chance of living to 94 and one-in-10 chance of living to 98.

If you die when you are in drawdown, any remaining pension fund can be passed to your children.

Annuities offer a secure lifetime income without ongoing investment risk or need for administration. But they are inflexible once established. Drawing down from your pension offers flexibility, the potential to pass on remaining funds and the opportunity for investment growth. But it also means ongoing charges, administration and investment risk. If markets fall or there is another crash, your pension fund could run out before you die.

Discuss these options and whether you could use a combination of the two to achieve your income goal with an IFA. Even if you don't buy an annuity now, regularly review your position as you could purchase one in the future.