Options for maturing investments
March 2009
Although it’s often very clear why you invest in the first place, what to do with your maturing investments can prove a lot more tricky.
Imagine you are in possession of a reasonably-sized cash sum, and you no longer have an income from employment or business. You therefore need to live wholly or partly upon investment income. What do you do?
Your investment capital could come from the cash part of a pension, from selling a home and moving to a cheaper one, or from an inheritance.
There are three main options for income where the capital is retained by the investor: equities, fixed interest and property. Each has subdivisions. Equities can be either direct shareholdings or funds. Fixed interest includes gilts and corporate bonds. Property can be residential or commercial.
Each type of investment has a different risk level attached to it. The most secure investment of all these examples, by a very long way, is gilts (UK government bonds).
The risk of default on capital or income is very low and, if such security appeals to you, then you will have to accept a modest income.
Corporate bonds generally offer higher interest rates than gilts but carry higher risk. Avoid bonds with a particularly high interest rate as they almost certainly indicate a higher risk to your capital. Not ideal if you are dependent on a steady income stream.
Way below the security of gilts come equities. You could opt for equity income shares which are designed to produce an income. Generally you might select a ‘high yielding’ portfolio investing in a fixed portfolio of several companies and then take a position of ‘positive inactivity’.
In other words, you ‘buy and hold’ the shares in expectation of receiving the dividends as income. The only decisions to be made are in the initial selections and the occasional change in company policy or slippage in share price which might kick-start you into action.
Remember, shares involve risk to both capital and income in order to try and achieve long-term growth in both, so this route is only for those prepared to live with that.
If income is your goal, then fluctuation in the value of your capital may not matter very much. However, unlike bonds you must allow for some variation in returns. As with all income yielding investments, the treatment of the income for tax will differ and you should take advice as to the best options for your particular circumstances.
Property too has some definite investment attractions. It cannot be denied that in many cases residential property in particular has been a good way to derive an income for many years by letting, whilst enjoying substantial capital growth. However property markets do have peaks and troughs, and the current turbulance fully demonstrates this. Investors need to be fully aware of these risks.
None of the above options are mutually exclusive, and for many income investors, a mix of these may be the best route. If you want to invest for income and enjoy an easy life, your first step might be to talk to an IFA. You can search for an IFA here.
