Tips on how to invest for income
Making the right investment choices has never been more important - and more complex - than in the current economic environment. It is clear they remain a major financial issue for consumers, as almost a third (27%) of all searches in August for an independent financial adviser on unbiased.co.uk, the professional advice website, were for advice on investment and savings. Unbiased.co.uk brings you top tips from IFAs on which markets and sectors offer the best opportunities, to help you make the right choices and the most out of your assets.
Danny Cox, Hargreaves Lansdown
"Increase your net income by using an ISA (Individual Savings Account). ISA income is free of taxation thereby potentially improving the amount of income you actually receive. Allocate your income bearing investments such as fixed interest and equity income funds to ISAs and this reduces any potential for further tax. ISAs are also free from capital gains tax allowing you to switch funds or cash in without a tax charge."
Alan Smith, Capital Asset Management
"Look for investment funds which hold B/BB Investment Grade corporate bonds - these are issued by strong companies who, as a result of the current credit markets are finding it difficult to raise capital from the traditional sources, including the banks. They are therefore compelled to offer very competitive rates (7-8%) to investors. Most of the bond issuers have strong balance sheets and are therefore unlikely to run into serious difficulties. In any event a good fund manager will spread your investments amongst a number of companies to diversify and reduce risk."
Gordon Bowden, Quainton Hills Financial Planning
"When investing for income always bear in mind the detrimental effect of inflation. Corporate and Government Bonds offer higher yields than cash but returns will be eroded by inflation. Investment in property or equities is the best way of trying to achieve an income that rises to keep pace with inflation. High income UK equity funds can offer excellent opportunities and tend to be less affected by stock-market downturns than growth equity funds."
Nick Evans, One Life Wealth Planning
"Where a client needs income to fund their lifestyle, their main focus should be predictability - in other words, knowing how much income they will receive each month. For this reason, we tend not to separate investment income from capital growth and simply use investment products which allow investors to make regular monthly withdrawals at a level of their choosing. With the right investment structure, this can be very efficient for higher rate tax payers as income payments are often treated as capital withdrawals. This of course means the annual Capital Gains Tax Allowance can be used to full effect. Our investment portfolios focus on total returns. The underlying investment becomes a function of risk management. We often describe this approach as income on tap. Simply because the level of income can normally be increased, decreased, stopped and started as suits the client's planning needs. The word of warning is that if the income taken (ie capital withdrawn) is greater than returns generated, then capital value will fall. Sometimes of course, this is not a bad thing. None of us live forever!"
Jason Witcombe, Evolve Financial Planning
"What "accumulators" really need is a strategy to help them accumulate so that they have an appropriate (not the biggest) pot of money at the point of retirement to provide for their spending requirements. This should encompass debt repayment and expenditure management as well as paying into ISAs, pensions, employer share schemes and so on. When they retire they need to think about how best to use the pot to fund their spending. Those investors who concentrate on strategy first, then products second will be the long term winners. Sadly, few people do this."
Kevin Tooze, Equity Partners
"Many people are disenchanted with the rate of interest from banks, building societies and even annuities or pension income, all of which are normally subject to income tax. You could hold direct shares and hope the dividends hold up but look at how worrying BP shares were recently. High yielding unit trusts or investment trusts can pay well but once again there can be high risk to the capital.
"One way of looking at income is to hold a staggered range of investments that may not mature for a year or more but offer high coupons for moderate risk. One such instrument is the structured product. They normally run a maximum of 5-6 years and are pegged against an index such as the FTSE 100. So long as the index is the same level or higher on the next anniversary the plan returns (Kicks Out) the capital and a payment in the region of 9% which is chargeable to Capital Gains Tax (CGT) therefore often rendering the payment very tax efficient.
"If the index is lower on the anniversary the plan rolls on to the next year and a further 9% is added and so on. Such plans have down side protection where the index can slide as much as 50% and your capital is still protected. However there is also counterparty risk (normally a large bank) who issues the underlying assets therefore you have to be comfortable with their credit rating and potential for default. We normally look at companies with AA or AAA credit ratings.
"Accepting the above increased risk as part of an income portfolio can prove lucrative but you also have to accept widely spaced income or maturity payments as a consequence. As ever a balance of investment types is the most appropriate approach."
Adrian Lowcock, BestInvest
"The fundamentals of the Asian economies continue to look attractive compared to the western world, where investors have historically looked for income. As the region's companies have matured and become more aware of the requirements of their shareholders they have been increasingly producing an income. The economic fundamentals of the region will help support profits and the expectation is for company dividends to grow. Combined with this is the potential for capital growth, through share prices and currency appreciation, making Asian income an attractive option to diversify investor's income streams."
Karen Barrett, Chief Executive, unbiased.co.uk comments: "With many options out there, and an unpredictable economic environment it is confusing for consumers to know where and how best to invest their money. Investing for income is the ultimate goal for many consumers, but knowing the right path to take to achieve this can be complex, and it can be very hard to have the confidence to make big decisions about your personal assets without a second opinion. Seeking advice from a qualified adviser will provide you with the information and help you need to have the peace of mind you are investing your money in the best possible way for you. Consumers should take action now and can carry out a free and confidential search on unbiased.co.uk's ‘find an IFA' service to find an independent financial adviser who can offer invaluable advice on the best way to invest for income."