Is It Possible To Get The Income We Need?Written on September 10, 2015 by Kirk Rice LLP
Financial Services QuestionsThe Question:
We have retired with a combined Pension Income £16,000pa net which covers our normal outgoings. To give us the lifestyle we would like we actually need an extra £12,000pa. We do have savings totalling £260,000. Is it possible or even realistic to expect this amount to generate the additional income? We are both 65.
Kirk Rice LLP answers:
To generate a Net Income of £12,000pa from your capital of £260,000 will require a Net Return of 4.62%. Allowing for Basic Rate Tax the Gross Return is 5.77%pa. It is ‘possible’ to realise a return this high, but in relation to the question ‘is it realistic’ the answer is probably not, although to a certain extent it will depend on your attitude to risk. If for instance you are both very cautious, you are unlikely to want to invest the money which means putting it in deposit accounts (or similar).
The interest rate you can expect will be a long way off the amount required. As an example National Savings & Investments* (NS&I) have an Income Bond paying 1.25%pa Gross (*Source: Moneyfacts Issue 321, July 2015). A good rate relative to other accounts of a similar type, but nowhere near what you need. To have a ‘realistic’ chance of ‘possibly reaching the 5.77%, you would need to invest a good proportion of the capital. This then assumes you are prepared to accept an investment risk which is a topic you will need to take detailed advice on. In the meantime you may find the following cash flows useful to consider. These ignore what you actually do with the money and show possible outcomes assuming generic rates of return based on starting capital of £260,000.
I have assumed each year you withdraw £12,000 (your Income) and that each year you increase the withdrawal by 3% to allow for inflation. If the capital grows by 1.0%pa Net (possible based on the NS&I account) the £260,000 could provide the Income of £12,000pa but at the expense of your capital, and after 19 years (when you are both 84) it would have gone completely. No more capital equals no more income. As you get older you may actually spend less i.e. fewer holidays. If so, staying with the same assumptions, you would still have capital of c£156,000 left after 10 years and may no longer require £12,000pa.
Increasing the assumed return to 3%pa Net means the money runs out in 22 years and at 5% it is 28 years. You need to consider what is more important; capital security or income, as based on the above you will have to compromise on one.
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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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