While many funds offer a higher return if they are left alone, it is possible to realise both good returns on your savings while also drawing a regular income from your investments. We’re frequently asked how Moyes Investments can help our clients achieve this, so we thought we’d share some insights with you…
The concept of investment income
For many people who have been used to receiving a salary while they were in employment, the idea of receiving an income from their investments and not having to lift a finger to earn it takes some getting used to. There’s still a common belief that investments only accumulate rewards if they’re left untouched over the long term, and that they don’t have the flexibility to be used for a monthly income. But the word ‘investing’ can mean many different things. It doesn’t have to be all about stashing your money away, it can also be about using your money to generate a living income. With careful planning and expert advice, your investment portfolio can give you the best of both worlds.
Assess your income needs
Do you want your investments to give you a monthly amount – maybe to supplement your pension – or would you rather receive dividend payouts at various times in the year?
As far as a monthly injection is concerned, one option would be to buy a selection of high-yield generating funds and then have the dividends paid into a holding account that you could access every month.
Alternatively, if you built a portfolio of income-paying funds that make their dividend payouts at different points in the year, you could spread your money across a wide range of diversified assets. The biggest drawback to this approach is that it doesn’t guarantee you the same income every time.
A third strategy is to choose funds that offer good long-term returns rather than too high a yield. You’ll need to plan this carefully so that your funds will have the best chance of making a profit and you won’t be forced to sell them at a loss, but with a little bit of extra forethought this strategy is a useful way of supplementing your income by selling units over time.
The reduction in dividend allowance
Prior to April 2018, investors could earn up to £5,000 in dividend income tax-free, but this figure was reduced to £2,000 for the 2018-2019 tax year. Basic rate taxpayers pay 7.5% tax on dividend income above this allowance, while higher rate tax payers pay 32.5% and additional rate taxpayers pay 38.1%. However, dividends on investments held in Isa accounts are tax free.
It’s interesting to note that the government’s independent tax adviser the Office for Tax Simplification (OTS) has suggested abolishing the dividend tax allowance to make the UK tax system easier to navigate and has also called for an end to the rule forbidding people to take out only one of each type of Isa in a year. That final recommendation, if implemented, could be especially beneficial to savers because it will potentially make tax-free saving much easier and more flexible1.
For those investors who want to sell their investments to raise cash, the tax-free Capital Gains Tax (CGT) allowance for individuals increased to £11,700 in April 2018 and £5,850 for trusts. Beyond that threshold, lower rate taxpayers selling investments will continue to pay 10% CGT, with higher and additional rate taxpayers paying 20%.
How Moyes structures income generated from investments
At Moyes Investments, we structure income at 4% (i.e. £4k income on £100k invested) across pensions and Isa’s because they are both grown tax-free inside.
Investment Bonds are a little more complicated because the plan is taxed at 20% CGT, although we still work on an income of 4%. We report quarterly to all our clients on the performance of their respective funds. In addition because we’re extremely mindful of the capital base, we also check that this remains sufficient to supporting the income being taken. Not every financial management company does this, but at Moyes we consider our client’s financial wellbeing our number one priority so we never take anything for granted. It’s all part of the exemplary personal customer service we’re renowned for.
The important thing to remember is that taking a regular income from your investments doesn’t have to be an overly risky or convoluted process, so long as you’re receiving up-to-date expert advice from a financial adviser you can trust. At Moyes Investments, we’ll always present you with the best and most suitable options available and ensure you have all the knowledge necessary to make an informed decision. After that, we will work with you to build and manage a portfolio that will give you the greatest chance of making your financial goals a reality. Contact us today on 01638 429975 or firstname.lastname@example.org. Our friendly team are always here to help.