Investor Clinic: How can I make £1100 per month from my £362K pension?


#1

Originally published at: http://whichinvestmenttrust.com/investor-clinic-how-can-i-make-1100-per-month-from-my-362k-pension/
Harry is soon to retire and needs your help on where to invest his saving pot to provide an income for him and for his wife younger wife for the remainder of both of their lives. Name: Harry Age range: 65 How long can you keep this money invested for? Until my 1st class…


#2

Investment trust do make a lot of sense for retired people needing an income because their dividend is much more reliable.

One point though is not all the trusts with the very long record of increasing dividends pay a high enough dividend for your needs on their own. Alliance Trust pays only 2.3%, but the good news if my maths is correct, you only need a yield of 3.04% to get to your £1,100 per month. This should be quite easy to achieve, and should allow you to invest for a little bit of growth too which should help your wife if she outlives you.


#3

Oh this looks like an interesting one. I don’t have time to do the research on this right now but call up @ronmac @mammon @arkwelder and @james_pigott

You should be able to generate some growth there too, which will ensure your wife has enough to sustain her, or you never know, perhaps you will live to 100 plus!


#4

Thank you for your advice so far City girl and Sandra Dore.


#5

I’m about your age but retired a few years ago. I use mostly a selection of investment trusts plus a couple of ETFs for my SIPP.

Conventional wisdom recommends paying off all debts if possible first, though with today’s low interest rates that may be less essential. ISAs are still useful, if only to reduce tax paperwork.

Divide your investments between different asset types - that is, diversify - which is a big topic and depends on your risk-tolerance and view on where the markets are going. My own portfolio is about 70% in equities, 20% in bonds, 5% in commercial property and the rest in “alternatives” such as infrastructure funds giving a yield of about 4%.

My specific ITs include City of London, Edinburgh IT, Foreign & Colonial, Blackrock Income Strategies Trust and Murray International - but there are many good alternatives.

Good Luck!


#6

@Harry
As with most of my advice - I would first recommend an annual subscription to a decent investment magazine which has good coverage of investment trusts. As it happens my preferred magazine Money Observer has just done an article on getting a £10k income from investment trusts - they achieved this from only £232k so your desire for £13,200 should be easily achievable from your £362K.
See this link http://www.moneyobserver.com/portfolio-ideas/10-trusts-10000-annual-income

They have chosen trusts with a range of dividend payment dates throughout the year to assist with your aim for a monthly income. The other general advice is to keep a years income in cash and then the lumpy dividend payments will top this up so you can withdraw a regular income easily.

Generally the trusts they choose are good obvious choices, the unusual choices are Middlefield Canadian Income and Princess Private Equity. Murray International has been through a bad patch recently - but the manager is very well regarded.

I’m a fan of private equity so would include Princess Private Equity (PEW) or F&C Private Equity (FPEO) in the mix.

Of the trusts they recommend I hold - City of London, Troy Income & Growth, Schroder Oriental Income & Princess Private Equity.

Additional trusts you could consider for greater diversification (generally with an income bias are) would be

  • Utilico Emerging Markets (UEM) for emerging markets exposure (3.8% yield)
  • Aberforth Geared Income Ordinaries (AGIT) for small company exposure (4.9% yield) - split capital
  • European Assets (EAT) for European smaller companies exposure (6.0% yield)
  • F&C Global Smaller Companies (FCS) for global smaller company exposure (1.0 yield)

Note - some of these aim to pay a yield based on NAV rather than just there revenue, so this may impact their capital growth. AGIT is a split cap trust which will wind up soon, but has additional risks (though I like the trust).

Final point
Worth considering your options with regards to how to implement your pension if you want your spouse (& or children) to have access after your death. The new pension changes have impacted this - so worth checking out for advice on this.
see http://www.moneyobserver.com/opinion/what-happens-to-your-pension-pot-when-you-die


#7

@Harry
One final thought - keep it simple! If you don’t really understand what a company is doing with your money then avoid it, whatever the theoretical benefits may be.


#8

No mention of income from any other taxable invetments, i.e. non-ISA assets - or has this been taken into account when determining the £1100 per month? Also, is the £362k the amount before or after the 25% tax-free lump sum has been taken? Or is the intention to take this 25% as tax-free regular income (given the recent changes that have been announced)?

Assuming that pension amount is net… On the face of it, £13200 from £362000 does sound a reasonable 3.65% yield, but because the income is to be taken from a pension then it will be taxed at your marginal rate, e.g. 20%. Assuming that you are a basic-rate tax payer, then to get the required £13200 of net income a gross income of £16500 needs to be generated, i.e. a gross yield of 4.56%. Looking at your other sources of income, i.e. the State and company pension plus the consultancy work, these income will use up all or most of your personal allowances so the proposed pension income is likely to be taxed in full.

But 4.56% isn’t over-onerous to achieve, and should still provide scope for the income to grow over the years - an important consideration if you are looking for the pension to also provide an income for your wife in later years, because her timeframe is likely to be in the region of forty years. Whilst growth of capital may not be a priority, growth of income certainly should be given the timescale. This would tend to suggest equities as being a fair sized percentage of the assets as these should be able to provide a growing income.

However, dividends can be cut, and a prolonged period of such a scenario could impact upon even investment trusts’ abilities to increase or maintain their dividends if the revenue reserve becomes exhausted. (Although I’m not entirely sure how relevant this argument is nowadays given the ability to pay dividends out of capital gains). To help to mitigate such an event, other asset classes can be considered, such as infrastructure, REITs/property, bonds (of various hues), or lower-yielding assets/equities that have a greater potential to increase their payouts at faster rates over the years combined with higher-yielding assets to compensate now for their lower income. On that basis you could also consider something like Schroder income Maximiser which boosts its income by writing covered options - perhaps not a fund that is best suited to a total return objective, but can be considered where income generation is the priority.

Regarding the ITs mentioned in the Money Observer article, I would specifically exclude Majedie and Middlefield Canadian Income. The former has failed to deliver to a stated investment objective, namely to grow the dividend at a rate that is faster than inflation. On the contrary, it has been cut in the last five years. The holding in its management company forms just over one fifth of assets - which tends to be a bit too incestuous for me. And at over three years, the revenue reserve is rather excessive - which raises questions over how the reserve managed to get so large; why the dividend was cut before the reserve was used to support it; what does this say about the managements willingness to utilise the reserve in the future.

That last point is also a concern with Middlefield - if that 10+ years’ worth of reserve is correct, then why has the income received been used to increase the reserve instead of being distributed to shareholders? The dividend was cut in 2009 and has not been increased since then. Neither of these ITs are ones that are I follow so there might be rational explanations is the appropriate documentation, but strange all the same. Given that the majority of its assets are equities then I’d also ask what it brings to to that portfolio that the other holdings do not. Ditto, Majedie.

Whether - and to what extent - to diversify away from equities when the timescale is long will depend on if you have a particular view of equities’ prospects over then next 30-40 years: will they be as good as the last 30-odd years? Not convinced that they will myself - but this is purely subjective opinion, and based mainly on the fact that interest rates have been on a downward trend for the last 30 years (making it cheaper for companies to issue debt to invest, perform share buybacks, support the dividend) and this isn’t going to be the case over the next 30 years. And some of the answer might be provided by how much you - and later, your wife - are prepared to tinker with the holdings are your outlook changes.


#9

@Harry
Investment Trusts are the best vehicle for income IMHO. The reserve (although as @arkwelder points out capital can now be used, although still frowned on) is key. When the likes of BP cut their dividend the unit trust world have to cut their’s but Investment trusts can dip into this reserve and continue or increase the dividend. If you have access to data look for dividend growth over 3-5 years that beats inflation, as well as looking for solid yields that are equal or above the All-Shares yield of 3.5%. @arkwelder has worked out your yield for your pot overall and that is achievable at a low risk (was 5-6 out of 10?).
Stocks I would be thinking of include City of London, Bluefield Solar Income (cheap now), 3i Infrastructure, HICL Infrastructure, Henderson Far East Income (uses derivatives to up the income thereby limiting capital growth in favour of income - riskier), Henderson Diversified Income, Perpetual Income & Growth, Merchants (riskier), Edinburgh, Murray International and there are more… Over a long period these should certainly provide some capital growth too. Apart from beating inflation income growth is crucial since if your pot grows in value you will most likely find your fees will increase in line with this. Try AIC Stats or Trustnet. Good luck.


#10

Thank you all for your replies and your wonderful, no, truly fantastic help.

It has taken me so long to respond because I wanted to do my homework and understand a little bit more about what I was getting myself in to. I have always wanted to know a little bit more about investing so I have been watching these forums, reading some of the articles and I watched the seminar on the internet.

My pension pot includes what is left of the tax free cash @arkwelder. I did spend some of it on the house, a new car and a wonderful holiday we are yet to embark upon. Also I gave some money to my adult children. I am still working for a few months so I haven’t spent anything on my living expenses.

I have gone for something relatively simple as @dunkuring suggests, and avoided things I don’t understand like the Aberforth one @scjim suggested (though I will take up your suggestion of a Money Observer subscription, I found an interesting article on that on this website too).

These are the trusts I am intending to invest in:

City of London,
Edinburgh IT,
Foreign & Colonial,
Blackrock Income Strategies Trust and
Murray International
Henderson Far East Income
Henderson Diversified Income
Princess Private Equity

In addition I am considering investing in theses two trusts that are in the Buy List page on this website:
Finsbury Growth & Income
Standard Life Equity Income

I’d like to personally thank @citygirl @scjim @james_pigott @dunkuring @arkwelder @sandradore
You are all terrific as Donald Trump would say but the difference is I mean it. Thank you.


#11

It seems like you have got bloody good advice there @Harry. Not bad for a Google search eh!


#12

I love these investor clinic’s best of all because I get so many good ideas from them from so many knowledgeable people on these forums.

You’ve done very well here @Harry.