£200k lump sum to invest for an immediate income

[AleisterCrowley]

There are a lot of IT fans on these boards
Is there any evidence that ITs outperform the market over the long term?
I mean academic studies rather than personal / anecdotal evidence - as there is a considerable body of research to suggest that managed funds in general underperform over time (something like 70% fail to beat 'the market')

Dod has already given many good reasons, however there are many more.

For example there are IT's and funds that pay far higher income than the market rate. Their total return tends to not be so good, but that's expected.
There are others that are significantly less volatile than the market.
Some who simply try to beat inflation and not loose money.
There are yet others that pay their dividends monthly.
Others who avoid sinful companies.
Given the options, why assume that the only reason to buy an active fund is to attempt to outperform the market.
Beating the market is certainly not the reason for some of my investments.

..there are IT's and funds that pay far higher income than the market rate Their total return tends to not be so good, but that's expected. . So for the convenience of taking dividends rather than selling down holding occasionally?
There are others that are significantly less volatile than the market. Maybe, I can see the appeal
Some who simply try to beat inflation and not lose money. Likewise, but do they achieve this long term?
There are yet others that pay their dividends monthly. Tail wagging dog I think, it is easy to maintain a buffer account and draw a monthly income from it
Others who avoid sinful companies. Fair point - ESG/ethical investing

[flyer61]

Alan,

reread carefully what Dealtn said above concerning do you really want to go for income. Then have a read of what Terry Smith has said about 'income' strategies. To declare my hand I do have some investments that are designed to produce an income and not much else. eg MCT, NAIT, HFEL, JETI.
But predominantly growth is where I would think you should be aiming. I feel a lot happier that my income comes from Microsoft, Pepsico, Johnson and Johnson, Unilever, Kone....and that income is growing!

Have a look at VCT's, of late these have become a form of middle class welfare with an entrenched dividend policy (of course this might change on a dime). As a higher rate tax payer an amount invested here would not be the end of the world.

Consider VMID and Law Debenture as your core holdings. Slightly less income however it should over time give you growth as well. Also fees are low on these two.

Use those ISA's! I may have missed it but are you maximising everything you can do in your partners name? SIPP/ISA etc.

For a REIT consider something like EPIC. It pays a monthly income.

Keep it simple!

[Alan7878]

Would you employ the same strategy and spend a bit more time on your annual tax return with various different ITs outside of an ISA

You will probably have to spend more time with your tax return regardless of where you invest if outside an iSA or SIPP. Don't forget that you can have up to £ 2,000 free of tax in dividends and £ 500 / £ 1000 in interest.

As far as Boards are concerned there's also
High Yield Shares and Strategies
viewforum.php?f=31

The "HYP" board is not really to be recommended as they will bite your head off if anything other than a very narrow range of UK FTSE 100 and 250 shares are mentioned. On paper at least it exists to discuss your issue, namely how to invest a lump sum for income.
viewforum.php?f=15

Thanks. I've also just read on gov.uk that dividends below £10k don't need a self assessment completed. You can just phone HMRC who will adjust tax code. Not exactly sure what that entails having never had to do either in the past.

[Alan7878]

Some points:
-I intend to retire in 2024 when I will have an NHS final salary pension (and about another £115k lump sum to invest) and want this £200k to provide an additional income to supplement my current income and then pension.

It's not clear why you want income, and I would ask myself exactly why I wanted income, particularly now.

Whilst working, and time resource constrained, I would be thinking about what additional income I would want now, other than for a few "treats". I would be looking at how future income could be created, to supplement that pension (which presumably is lower than your current salary income) at a time in my life when I would have the time to enjoy it.

Now it might only be 3 years away, and hopefully for a long time thereafter, but to me that says "growth" strategy not "income strategy", with potential tapering from the former to latter over time.

An excellent point. I was wondering if i could use the capital to increase my income for some extra holidays over the next few years but they are just 'treats' and I'll need to think about the opportunity cost of missing out on a higher income in retirement, when my pension will be lower than my current salary. Thanks

[Alan7878]

Is there an argument against using some of it to pay off the mortgage then putting the £20k annual payments into an ISA or savings?

Yes, I'm definitely considering this although my mortgage is low at 0.69% above base rate. Thanks

[Alan7878]

Alan,

reread carefully what Dealtn said above concerning do you really want to go for income. Then have a read of what Terry Smith has said about 'income' strategies. To declare my hand I do have some investments that are designed to produce an income and not much else. eg MCT, NAIT, HFEL, JETI.
But predominantly growth is where I would think you should be aiming. I feel a lot happier that my income comes from Microsoft, Pepsico, Johnson and Johnson, Unilever, Kone....and that income is growing!

Have a look at VCT's, of late these have become a form of middle class welfare with an entrenched dividend policy (of course this might change on a dime). As a higher rate tax payer an amount invested here would not be the end of the world.

Consider VMID and Law Debenture as your core holdings. Slightly less income however it should over time give you growth as well. Also fees are low on these two.

Use those ISA's! I may have missed it but are you maximising everything you can do in your partners name? SIPP/ISA etc.

For a REIT consider something like EPIC. It pays a monthly income.

Keep it simple!

Thanks Flyer61. The growth v income argument does make things tricky. Never looked at VCTs so I'll check them out and some of the ITs that you mentioned which I haven't looked at before

[Hariseldon58]

Some very interesting suggestions about providing income from investments.

I have been living off my investments since 2007 and am 62. I presumed in 2007 that a steady income from shares would work out just great, the events of 2008-2009 demonstrated that ‘things’ happen..

Since then I have regarded money as fungible, I may receive a dividend in an ISA and rather than notionally spend that, if I had some investments in a non tax sheltered account then I would sell some each year for funding ISA’s SIPP’s and just sell a little bit more and spend that money instead.

I believe separating the spending from matching portfolio income just works, (portfolio income rose by 60%+ after 7 seven years but flat for the last 7 years... but capital is up by 70%+ in the last 7 years)

Equity Income trusts both Global and UK still have merit, they will keep paying dividends in the teeth of market difficulties as we have seen and I presently hold about 18% of the portfolio in these Trusts and if viewed over say a 10 year period, I am sure they will work out well and offer a better outcome than say Corporate Bond holdings, in addition its bit of a value play. It’s unlikely that I will spend the income but simply reinvest it in the portfolio as a whole.

FWIW I have Merchants, City of London IT, Shires, Lowland, Murray Income, North American IT, Murray International, Scottish American and TR Property Trust.

For the OP being a higher rate tax payer then I would stick to my regular portfolio mix ( with not too much income) and just spend a little capital as required...The OP would presumably add to his ISA each year, income trusts could be held there. This is subject to the CGT allowance remaining.

[hiriskpaul]

If you want income, and I am not sure exactly why you do, have you considered the NHS Additional Pension? Guaranteed index linked income at a price DC pension holders would die for.

[tjh290633]

There are a lot of IT fans on these boards
Is there any evidence that ITs outperform the market over the long term?
I mean academic studies rather than personal / anecdotal evidence - as there is a considerable body of research to suggest that managed funds in general underperform over time (something like 70% fail to beat 'the market')

The Annual Reports of the global ITs usually have long term performance charts comparing them with their chosen benchmark. The ones I have just looked at give 10 year records, but in the past they have gone back much further in their graphs.

Often the global ITs use composite benchmarks, and some use multiple managers. The one thing that is usually consistent is the comparison between their dividends and the RPI.

TJH

[Alan7878]

If you want income, and I am not sure exactly why you do, have you considered the NHS Additional Pension? Guaranteed index linked income at a price DC pension holders would die for.

Interesting point Hiriskpaul. I hadn't looked at that for a number of years. Just reviewed the NHS pensions website and the calculator suggests that I can buy units of £250 in additional annual pension for £4880. That would be £200 after tax and so about 4% return if I am calculating this correctly. Like the rest of my pension, it increases with CPI each year from the payment start date. Not sure if it's revalued using CPI during the intervening three years prior to my retirement if I purchased today, but I expect it must be. The only problem is that I wouldn't be able to take it until I'm 60 and I have special class status allowing me to retire early at 55. when I would get my main pension. I could bridge a higher income level from ISAs for those 5 years though knowing my pension will increase from age 60.

Thanks

Alan

[jonesa1]

Thanks. I've also just read on gov.uk that dividends below £10k don't need a self assessment completed. You can just phone HMRC who will adjust tax code. Not exactly sure what that entails having never had to do either in the past.

You can also provide dividend income details online (potentially less frustrating than trying to get hold of someone by phone), both forecasts for the current year and actuals for the previous year. Register at the government gateway to get access to a number of HMRC services, including the ability to check your NI contribution status.

Andrew

[veeCodger1]

Equity Income trusts both Global and UK still have merit, they will keep paying dividends in the teeth of market difficulties as we have seen

I think this would be the main benefit that income ITs could give the OP.

FWIW I have Merchants, City of London IT, Shires, Lowland, Murray Income, North American IT, Murray International, Scottish American and TR Property Trust.

I wonder how this performance would compare to a world tracker (e.g. VRWL), where the OP could have regular drawdown instead of dividend from ITs. I suspect the world tracker would produce superior returns and may need a safety margin, although this might not be applicable to the OP.

VC

[Alan7878]

Thanks. I've also just read on gov.uk that dividends below £10k don't need a self assessment completed. You can just phone HMRC who will adjust tax code. Not exactly sure what that entails having never had to do either in the past.

You can also provide dividend income details online (potentially less frustrating than trying to get hold of someone by phone), both forecasts for the current year and actuals for the previous year. Register at the government gateway to get access to a number of HMRC services, including the ability to check your NI contribution status.

Andrew

Yes, sounds much easier. Thanks Andrew

[Alan7878]

Equity Income trusts both Global and UK still have merit, they will keep paying dividends in the teeth of market difficulties as we have seen

I think this would be the main benefit that income ITs could give the OP.

FWIW I have Merchants, City of London IT, Shires, Lowland, Murray Income, North American IT, Murray International, Scottish American and TR Property Trust.

I wonder how this performance would compare to a world tracker (e.g. VRWL), where the OP could have regular drawdown instead of dividend from ITs. I suspect the world tracker would produce superior returns and may need a safety margin, although this might not be applicable to the OP.

VC

VC - I'm struggling with this question of simple trackers over a basket of ITs. As previously suggested, I may decide to do both. Have trackers outside of ISA with a cash cushion and put money in ISAs each year into a basket of ITs. In reality, I don't need this money for a few years and that time should help me to paper over any cracks that appear within the investing landscape over the intervening period. I would also be happy to take 3% income from 2024 and increase each year by inflation, hoping that my capital would slowly grow. Thanks

[AleisterCrowley]

Thanks. I've also just read on gov.uk that dividends below £10k don't need a self assessment completed. You can just phone HMRC

Yes, you can contact HMRC but in my opinion its much easier to do a tax return online, and you get to see all the workings rather than having to keep lots of records
(Tax is payable on dividend income over £2,000 if you are a taxpayer- rate depends on which band you fall into)

[1nvest]

Excellent responses all, thank you very much. I do like the idea of a diversified basket of ITs for growth and income; particularly for the funds within an ISA. I'm also wondering about the intervening years when the majority of money will be outside of ISAs but I still want to achieve growth/income. Would you employ the same strategy and spend a bit more time on your annual tax return with various different ITs outside of an ISA OR, would you go for something simpler like a world tracker with one or two years in cash/bonds/other to feed income and ISA each year?

Thanks again

Alan

Gilt capital gains are free from CGT, with low yields on those and cash the tax implications of being outside of ISA are low. Gold legal tender coins are CGT exempt. Have a read about the Golden Butterfly (GB), which is a 80% Permanent Portfolio (Harry Browne's, that you'll also need to read about) and 20% stock asset allocation.

Basically a standard GB might be 20% in each of 20 year gilt, cash deposits, gold, FT250, S&P500. But give that a brain. Pretty much at any time one of the assets will look to be a bad choice and more often that comes to fruition. 1980 and the Dow/Gold ratio was 1.0, gold was expensive so if started then drop gold from the set. Rebalancing isn't required, just let the assets ride, but periodically reset/restart, which is in effect rebalancing to some extent, as/when valuations look extreme. 1999 and Dow/Gold was up at 40 levels, so stop/restart with a lower allocation to stocks. Recently interest rates are very low so restart without Long Dated Gilts ...etc.

For income, apply a 3.3% SWR that should be a perpetual rate (PWR) i.e. 3.3% of the initial amount, uplifting that by inflation as the amount drawn in subsequent years - so a nice consistent inflation adjusted income come what may where inflation adjusted capital value is not only likely broadly preserved, but expanded by a decent amount over time (3% real+ type rate).

Starting for instance with 25% in FT250, 25% US stock, 25% gold, 25% cash at recent valuations and the cash could near enough be stuffed under the mattress, gold might be legal tender coins, both outside of ISA. Leaving 100K of stock outside of ISA but that with a couples allowances could have 80K of that migrated into ISA using this years and next years ISA allowances if not already used ... within weeks.

Prepare to be blown away by the actual rewards generated and the low downside risk/volatility (worked long term in UK, US and even did very well in Japan since 1970's).

[swill453]

Starting for instance with 25% in FT250

That was doing pretty well for me until Brexit reared its ugly head. Lacklustre since, and I'm out.

Scott.

[AleisterCrowley]

....
Starting for instance with 25% in FT250, 25% US stock, 25% gold, 25% cash at recent valuations and the cash could near enough be stuffed under the mattress, gold might be legal tender coins, both outside of ISA. Leaving 100K of stock outside of ISA but that with a couples allowances could have 80K of that migrated into ISA using this years and next years ISA allowances if not already used ... within weeks.

Prepare to be blown away by the actual rewards generated and the low downside risk/volatility (worked long term in UK, US and even did very well in Japan since 1970's).

Why the US/UK bias?
Neutral global tracker like VWRL, or Life Strategy 100 with its UK bias(from memory) may be options

[1nvest]

The Permanent Portfolio (PP) requires use of domestic stocks as the interworkings (low/no/inverse correlations) between those and gold, gilts etc. is best served that way. The PP is based on economic cycles.

US stocks added to the PP - as the US$ is the primary reserve currency. For a US Golden Butterfly investor they'd hold US large cap, US small cap, US long dated treasury, US$ cash deposits, gold. FTSE250 in US scale is small cap.

[1nvest]

Starting for instance with 25% in FT250

That was doing pretty well for me until Brexit reared its ugly head. Lacklustre since, and I'm out.

Scott.

Much the same as Berkshire Hathaway lagging the S&P500.

Incomplete 2021 fiscal year data but my last recording for a three way equal FT250/BRK/gold blend indicates ...

Scanning down the TJH HYP accumulation and FT250 columns and the two somewhat aligned with each other. Pretty much just 'noise' of differences.

I'd consider selling out rather than staying the course to be more a case of profit chasing, likely leading to a worse outcome.

Annualised
3.9% TJH HYP Accum
4.7% FT250
8.8% FT250/BRK/Gold