Inheritance - investing for income

[Panamax]

LooneyTunes said:

The issue with many forms of equity investment, is that there can be a lack of indexation. You take income, but the value of the capital gets eroded over time.

Equity investment should have delivered excellent returns, well ahead of indexed inflation.

FTSE 100 has moved well ahead of inflation during the past 40 years. Bear in mind the index is purely capital growth, ignoring income paid out as dividends.
May 1984 - Index 1,100
May 2024 - Index 8,200
Inflation: £1 in 1984 = about 31p today.

S&P 500 has done even better, although its lower income yield needs to be taken into account.

[Winchmore]

I would advise my friend to take several months out without spending the money, and educate myself on the pros and cons of possible scenarios and what is important in life.

No need to rush, but you do need to understand the basics of investing.

[Countdown]

Thanks for all the comments and advice.

I should perhaps have emphasised that

1. it needs to be as simple as possible
2. She's not worried about tax, or maximising her possible income
3. She only needs £25k per annum to maintain her lifestyle (she has another source of income which is index linked)

As far as I can see something like VWRL with the dividends being paid into her bank account should be sufficient?

[bitchstewie]

Honestly given the above and until she finds her feet I think there’s a lot to be said about parking it in NS&I.

Zero risk and enough return not to need to worry whilst she digests all the options.

[Sheepshanks]

Mr Whippy said:

Lend money to an entity?

So you lend money into a Ltd, Ltd trades, repays you your loan to it, you pay no income tax on money received, but which you already held.

You’d have made 5% in the bank, but now the business has to make profit to pay tax and make your repayment, and surely it’d have to pay with interest?

Is that where the supposed spread/margin is, saving on the spread of a loan to the business?

He said there's no tax on repayment of the capital (principal).

My mate is doing exactly as described, and, as it happens with a £1M too. He reckons the company can pay him interest at pretty well any rate it likes, which is taxable of course. He doesn't intend to take much as he's already a high earner, but the company can pay salaries to his wife and their kids (at uni).

He's doing this - paying cash for a bunch of flats in a limited company - mainly for generational tax / IHT planning reasons. There's all sorts of things possible in a multi-generational family business - the company can, via a trust, pay his grandchildren's school fees, for example.

[xeny]

VWRL might be a bit short just on a dividends basis.

I think she's going to have to accept doing a tax return from the avoiding complexity viewpoint, and it's worth at least going to the effort of ISA wrapping as she goes through, to give some margin, should her tastes change later in life.

[Countdown]

bhstewie said:

Honestly given the above and until she finds her feet I think there’s a lot to be said about parking it in NS&I.

Zero risk and enough return not to need to worry whilst she digests all the options.

I think it might well end up being something like that.

https://www.nsandi.com/products/income-bonds - gives her £35k per month, so £28k after 20% tax.

Or maybe these https://www.nsandi.com/products/guaranteed-income-...

[xeny]

Panamax said:

LooneyTunes said:

The issue with many forms of equity investment, is that there can be a lack of indexation. You take income, but the value of the capital gets eroded over time.

Equity investment should have delivered excellent returns, well ahead of indexed inflation.

People sometimes pick unrealistically high yield investments, without noting they achieve that by eroding capital - see https://www.pistonheads.com/gassing/topic.asp?h=0&... for example.

Throw in an IFA taking 1% and/or a total return approach without considering inflations impact on nominal values, and it is pretty easy to end up with substantial capital erosion.

[Mr E]

Countdown said:

https://www.nsandi.com/products/income-bonds - gives her £35k per month, so £28k after 20% tax.

A year, no?

[Countdown]

Mr E said:

Countdown said:

https://www.nsandi.com/products/income-bonds - gives her £35k per month, so £28k after 20% tax.

A year, no?

[LooneyTunes]

Sheepshanks said:

Mr Whippy said:

Lend money to an entity?

So you lend money into a Ltd, Ltd trades, repays you your loan to it, you pay no income tax on money received, but which you already held.

You’d have made 5% in the bank, but now the business has to make profit to pay tax and make your repayment, and surely it’d have to pay with interest?

Is that where the supposed spread/margin is, saving on the spread of a loan to the business?

He said there's no tax on repayment of the capital (principal).

My mate is doing exactly as described, and, as it happens with a £1M too. He reckons the company can pay him interest at pretty well any rate it likes, which is taxable of course. He doesn't intend to take much as he's already a high earner, but the company can pay salaries to his wife and their kids (at uni).

He's doing this - paying cash for a bunch of flats in a limited company - mainly for generational tax / IHT planning reasons. There's all sorts of things possible in a multi-generational family business - the company can, via a trust, pay his grandchildren's school fees, for example.

+ potentially pensions etc, not to mention that after the debt is repaid you own a company with £ assets that are still generating income (albeit you may not be able to draw this as tax effectively).

[Phooey]

I’d deffo put 50k in Premium bonds

[bitchstewie]

Countdown said:

bhstewie said:

Honestly given the above and until she finds her feet I think there’s a lot to be said about parking it in NS&I.

Zero risk and enough return not to need to worry whilst she digests all the options.

I think it might well end up being something like that.

https://www.nsandi.com/products/income-bonds - gives her £35k per month, so £28k after 20% tax.

Or maybe these https://www.nsandi.com/products/guaranteed-income-...

Honestly the way I see it is that parking the situation (inheritances tend not to be pleasant) your friend has a million quid and only needs £35K/year (ish) to live comfortably.

She's already won.

To borrow a Warren Buffett quote it's insane to risk what you have for something you don't need - make sure she remembers that.

My personal view is your friend needs to take some risk with some of the money but it's not an all or nothing thing and there are tons of options.

She could keep a third in cash or whatever it takes to sleep at night knowing you have absolutely no worries for ten years whilst investing the rest in something that meets her appetite for risk which she probably doesn't know yet because having a million quid overnight tends to focus the mind.

There will be all manner of options and as I'm sure your friend will find out there will all manner of advisors only too keen to suggest them to her for a "small" cut of her wealth.

But if you want her to remain your friend don't tell her to go buy 20 buy to lets in some dodgy part of Glasgow yielding 12% or whatever other batst someone will inevitably suggest.

[Panamax]

Phooey said:

I’d deffo put 50k in Premium bonds

"Line up everyone with £1,000 worth of Premium Bonds in order of their year's winnings, and the person halfway along would have won... not a penny! In fact, you'd need to walk past 60% of the line until you hit the first £25 winner."

More on this useful link,
https://www.moneysavingexpert.com/savings/premium-...

[Phooey]

Panamax said:

"Line up everyone with £1,000 worth of Premium Bonds in order of their year's winnings, and the person halfway along would have won... not a penny! In fact, you'd need to walk past 60% of the line until you hit the first £25 winner."

More on this useful link,
https://www.moneysavingexpert.com/savings/premium-...

Yes, there's better investments but the point of Premium Bonds was any winnings are free of tax.. plus putting £1m into tax-efficient wrappers / savings will take a number of years. You could put 50k into PB's instantly.