- Portfolios diversified across various assets can provide a good income
- Lower costs and tax efficiency may mean these portfolios don't need to generate as much as your buy-to-let property did
- If you are retired, annuities are one way to generate a regular guaranteed income
Higher mortgage costs or the burden of administration may mean that you are one of the increasing numbers of landlords quitting the market and selling. However, if you depended on a steady stream of property income to fund your expenditure you will need to replace it with something similarly reliable.
On the plus side, your earnings from your new source of income should go further because you no longer have the expenses associated with running a rental property. And if your new sources include a portfolio of securities, you can hold them within a individual savings account (Isa) so the income generated is not lost to tax – another reason why you may not need to generate as much income.
When you have worked out how much you need to generate and how much you are prepared to risk to get it, you can allocate appropriate amounts to different assets such as equities, bonds, cash and alternatives. Typically, the more money you need the higher the risk you must take, but consider your capacity for loss and time horizon – volatile assets are not suitable for pots of money employed over a short timeframe, or which you cannot afford to lose. Higher-growth targets need to focus more on assets such as equities, and more cautious profiles can concentrate on bonds, cash and lower-risk alternative assets.
But some allocation to growth investments is relevant in most portfolios because an equity component is a key way to beat inflation over the long term and can help to ensure that you don’t run down the capital value of your portfolio prematurely.
The value of income payments is not guaranteed, and the amount you will receive from year to year will vary. So consider also taking regular withdrawals from your portfolio, perhaps cashing in parts of investments that have grown. Equally, be mindful not to shrink your portfolio beyond the size necessary to last for the period that you need it. Rachel Winter, partner at wealth manager Killik & Co, says that annual withdrawals of 3.5 to 4 per cent are likely to be sustainable on a long-term basis.
On top of this, have a cash reserve worth at least three to six months of your expenses so that you do not have to cash in investments when their value has fallen.
As a broad guide to the sort of percentage ranges you might have in each asset class, you could look at the Investors' Chronicle Alpha asset allocation models. You may be in a similar situation to the investor featured in a recent Portfolio Clinic ('I've ditched buy-to-lets – can I invest and earn £30,000 a year?'). This investor was classed as ‘balanced’ and the IC Alpha asset allocation for this risk level is between 50 and 60 per cent in equities, with most of the rest in government bonds alongside a small allocation to gold.
After you have set up your portfolio, “periodically reassess your financial situation and income needs”, says Peter Hargreaves, financial planner at EQ Investors. “Adjust your investment strategy as your circumstances change.”
What to hold
The lower-risk segment of your portfolio could currently include cash as some accounts offer attractive rates of interest. For example, NS&I Guaranteed Growth and Income Bonds offer annual equivalent rates of 6.2 per cent, and the income bonds pay out interest every month.
Income investors could also include lower-risk bond funds that offer a steady sterling-based income in the lower-risk segments of their portfolios. Winter says that for less volatility look to short-duration bonds. Ways to invest in these include AXA Sterling Credit Short Duration Bond Fund (GB00B5VL0B78), which had a yield of 2.82 per cent as of 15 September, according to Morningstar. It makes payouts four times a year.
Typically, funds make payouts two or four times a year. However, a few bond funds offer monthly income payouts, including Premier Miton Strategic Monthly Income Bond (GB00BMWVS003), which had a yield of 5.12 per cent as of 15 September, according to Morningstar. The fund typically has a bias to investment-grade bonds considered less likely to default. However, strategic bond funds' managers can invest across various types of fixed income so can take on more risk than when you first invested. Premier Miton, for example, notes that this fund “could invest up to 60 per cent in sub-investment-grade [lower quality] bonds”.
For equity allocations, Investment Quorum chief executive Petronella West suggests blue-chip equities, some of which offer attractive yields. Aside from direct investment, ways to get exposure to these include GAM UK Equity Income (GB00BF09N571), which had a yield of 5.04 per cent as of 15 September, according to Morningstar.
Options for overseas equity exposure include Fidelity Global Quality Income UCITS ETF (FGQD), Fidelity Global Dividend (GB00B7778087) M&G Global Dividend (GB00B39R2R32) and Trojan Global Income (GB00BD82KQ40). These offer a decent level of income that should appreciate over time with long-term capital growth, so are a good complement to higher-yielding, lower-growth investments.
For an allocation to alternative assets, infrastructure investment trusts tend to offer respectable income streams and their revenues are often linked to inflation. Winter highlights 3i Infrastructure (3IN) and International Public Partnerships (INPP).
How to get a regular income in retirement
If you are retired or about to retire, an alternative to regular rental income is an annuity, which can provide guaranteed income for a specified period or the rest of your life. The rise in gilt yields has made annuity rates much more attractive.
But you don’t need to annuitise all your retirement income. Rather, you could purchase an annuity of a value that provides a payout that ensures your annual basic expenditure is covered by secure income. And an annuity may not be necessary if income from the state pension and/or defined-benefit (DB) pensions already covers your basic expenditure.
If you are looking to, for example, bridge the gap between when you retire and start to receive the state pension, you could take out an annuity for a limited time period, although these don’t take into account medical conditions so you can’t receive an enhanced rate. See The best ways to use an annuity.
However, annuity income is taxable at your marginal rate. The personal allowance enables you to get income of up to £12,570 a year free of income tax, but if you have used this up on other income such as the state pension and/or DB pensions, a new stream of annuity income would be taxed. So in such situations drawing from assets held within an Isa would be much more tax-efficient.
On top of this, you can’t pass annuities on to beneficiaries after you die whereas if, for example, you lived off the natural yield of an investment portfolio, you could leave the remaining capital to beneficiaries.
