If you need an income boost to pay off your mortgage and have £100,000 to invest, you are probably wondering where to invest it for an income. To correctly answer your question, you will need to decide which of the two items below is convenient for your situation:
Which investment should I make with £100,000 for an income boost?
Though you can do both simultaneously, investing your money for immediate income and long-term growth are two different things. I will first deal with how you could invest £100,000 to generate income, and then we will look into how you could invest £100,000 for growth.
Seek financial advice from an independent professional
If you are unsure or uncomfortable about running an investment on your own, it is wise to seek the advice of an independent financial professional. Your more extensive financial and personal situations will need to be taken into consideration before you can begin your investment.
Some of the questions they might ask you are; what is your age? Are you married? Are you a high-income taxpayer? Is your spouse a non-tax payer? What is the timescale of your investment? Do you need to access your capital during the investment? What is your attitude towards risk?
If you cannot access a reputable financial adviser who is an investment specialist, but you would like to get some assistance during your investment. You can use your trusted friends to get referrals to a qualified one close to you.
Assets to invest in
There is a range of assets available to invest £100,000, either by the help of a financial adviser or by yourself. I will run you through each of the top assets to better judge which one best suits your preferences.
Assuming you want to invest your £100,000 for income, buy-to-let is one of the best options. As a country, we are obsessed with private home ownership; hence the property is often considered a safe investment. You have probably heard of property investment more than a hundred times.
While returns from property tend to be less dependent on most market pressures, they are not without risk. House prices have, in the past, managed to beat inflation, but like the investment markets, the housing market also experiences periodic price crashes and correlations.
For buy-to-let investors interested in rental income, the average property yield in the UK is approximately 5% before tax. However, there are massive variations across different regions. There are often large initial capital investment requirements as property is not a liquid investment, and therefore, buy-to-let investments should not be taken lightly. Additionally, buy-to-let investors recently had their level of tax relief reduced while the stamp duty has increased significantly. If you have interests in a buy-to-let investment, this means that it is only lucrative if you purchase a property with an as little mortgage as possible.
Like most people, you might be thinking of money as the starting point when investing for income; however, it can be the destination. If you aim to get the best interest rate for your £100,000, then I would recommend reading my detailed guide on seven steps to accessing the highest interest on savings above £100,000. The guide is free, and it provides the essentials of obtaining the highest interest and protection on your savings. The article will guide you on:
If you would rather go into the investment alone, you will need to realize that the real value of deposit money can be quickly lost, with inflation going above most account interest rates. Savers have, for a while now, been searching for an alternative since the withdrawal of the National Savings and Investments (NS&I). As per the Retail Prices Index (RPI), NS&I Index Linked Savings Certificates provide savers with a tax and risk-free way to beat inflation.
What are the remaining alternatives?
One of the remaining alternatives to earn a higher interest rate from your savings account is keeping your money in the account for a longer fixed term. For the best interest rates on your instant access account, you can review our table: for a guide to the best savings account. The rates, however, often fall short of the inflation rates. Finding the most attractive fixed-rate savings bond in the market that can provide enough interest to beat the inflation rates is a wise option. The advantage of the bonds is that they can be held in a cash ISA and hence the returns can be tax-free.
It is critical to note that these bonds will restrict your access to the capital during the period of the bond or impose severe penalties if you wish to withdraw your funds earlier than agreed.
Another thing to think about is that the Bank of England Base rate influences the interest rates on savings and mortgage. If it started to return to normal, which is about 5%, you could get stuck with less competitive prices in your deal than in an ordinary savings account.
An excellent tool to find a lucrative deal would be the savings account tracker. The tracker will not only advise you on good deals in the market but also tell you if your current savings account is offering you a good deal by simply entering the details of your savings account. It will monitor the markets for you and send an email every time there is a better deal on the market than your current account.
If you have stuck with putting your money in a savings account, you will need to limit the capital held with a single financial institution to £85,000. The Financial Services Compensation Scheme will, however, not cover sums above £85K should your bank of choice go bust.
All National Savings and Investment bank accounts are fully backed by the government and therefore present no risk of investment. However, the returns from these accounts are unsurprisingly, not the most competitive.
Peer-to-Peer lending (the alternative to savings accounts).
Interest rates can sometimes discourage you from depositing your money in a savings account. An excellent alternative to provide you with a better rate is peer-to-peer lending. A regular savings bank uses your deposited funds to lend to other people as loans. From the profits accrued on the loans, the bank can pay the interest your savings have earned. On the other hand, peer-to-peer lenders cut off the middleman (the bank), allowing you to lend your money directly to borrowers at a higher interest rate.
Which investment should I make with £100,000 for an income boost?
Much like a bank, peer-to-peer lenders parcel up your funds into smaller loans to manage risk. The interest rates are much higher with peer-to-peer lending than in a regular savings account because, without the bank, you get more of the profits since there are no employees and bank branches to pay for.
While the Financial Services Compensation Scheme does not presently cover peer-to-peer lending, the industry is gaining support from the Government of the UK. In fact, the government announced that the first £1,000 of interest made from peer-to-peer lending is now tax-free for basic rate taxpayers just as with regular savings accounts. Additionally, there are certain ASAs that apply to peer-to-peer savings. Given UK savers have lent over £600 million to date, peer-to-peer lending is an attractive alternative to invest your £100,000 into.
One of the most reputable peer-to-peer lenders in the UK is Ratesetter. With Ratesetter, you can get an interest of up to 6.0% annually on your money. They also offer you the ability to do so via an ASA and give you a £100 on your first £1,000 investment. Various industry award bodies have also named the company as the best peer-to-peer lender on several occasions.
In theory, you could invest in shares for direct income, and hopefully, they will earn you an income stream through regular dividend payments and a little capital appreciation. You can then use the tax allowance on your annual capital gains to receive tax-free income or at least in part.
The biggest problem with direct equity holdings is that if you get your research or timing wrong, you stand the risk of losing large sums of your investment and income stream. In 2008, people who invested in banks bared witness to this fact. A report from Barclays Equity Gilt Study says that equities have produced around 5.4% annual return over a period of 50 years. That does mask the huge crashes and market rallies.
Assuming you intend to invest in equities for income generation, shares can offer you regular dividend payments. Firms can opt to pay out some of their profits to their shareholders in the form of dividends. Technically speaking, you could live off of the regular dividend a portfolio of shares could earn for you. It is not, however, that easy to build a portfolio of stocks that can generate a dependable and regular income. You will find a better method later in this article, using funds.
Corporate bonds are basically loans that you provide to companies at an agreed interest and your original loan amount at a specific date. Some companies are riskier than others and are likely to default, and hence have a greater potential return through compensation. However, with greater risk, the potential for more significant losses is significantly higher.
The safest options when investing in bonds are Gilts (loans to the UK government), investment-grade bonds (loans to companies with high credit ratings), non-investment grade, and high yield bonds (loans to firms with low credit ratings). Bonds, like equities, can be held directly with several companies, such as Tesco, marketing their bonds to the public directly.
Though past performance has never been the best guide to future returns, the typical annual return from bonds has been 4.37 over a 20-year period. Bonds are considered to pose a lower risk than equities. However, from an income generation perspective, bonds will tend to provide an income that does not grow over the long-haul. If you want your income stream to beat the rate of inflation, you should consider investing in equities.
The assets above are just a handful of the main investment asset classes. I would love to discuss hedge and commodities in this article, but it would be a little too much to digest at once. My main point is that you have a wide choice of assets to invest in and produce some income.
Up until now, I have only discussed holding assets directly. Investing all your capital in a single asset is contrary to the famous saying; do not put all of your eggs in one basket. Most people prefer investing through an investment product or wrapper on several investment funds which in turn invest in a range of assets.
The two most important things to consider when investing is how to invest and what to invest in. How you invest is whether you decide to invest via a pension, collectives, investment bonds, etc. On the other hand, what to invest in is the underlying investment such as bonds, equities, property, etc.
How to invest funds
Funds pool investors’ money together to put them at an advantage from the economies of scale and their ability to easily change their investments. Understanding the metrics of how investing in funds works is much simpler than it sounds.
Each of the investment wrappers/vehicles listed below is taxed differently and is governed by its own rules concerning access to the funds and drawing an income which can be explained in full detail by a financial adviser.
General Investment Account
Basically, this is buying funds (Investment trusts/Unit trusts) outside any investment wrapper. They are pooled funds that combine large sums of investors' money, and the funds are run by an investment manager with a specific objective/ method. The method can be based on the type of assets such as shares, bonds, property, or a geographical region. The manager will buy and sell a broader range of holdings, hopefully reducing the risk of investing in a single company's shares. When joint investments are held directly, they are almost always subject to income and capital gains.
Stocks and Shares ISA
This is basically a tax wrapper that can hold shares, cash and collective investments. The advantage of investing via an ISA for income generation is that capital and income gains are tax-free. However, you have a limited subscription of £20,000.
In defined personal pensions or contributions, you can also invest in all the assets mentioned above but not residential property.
These are offered by life insurance companies, which are subject to income tax. The flexibility of their investment is usually limited to a range of investment funds.
Building a Portfolio
You can diversify your investments by building a portfolio so that all your eggs are not in one basket. Other than the amount you choose to invest, there is practically nothing stopping you from spreading your risk by increasing the range of assets you invest in. Choosing the right asset combination to suit your current situation can go a long way in enhancing your returns.
Most investors will opt to invest via funds (either as unit trusts or in a pension or ISA) as an easy way to gain some exposure in all the assets detailed above.
Ready-made income portfolios
Fortunately for you, investment professionals have already done the hard work for you. I would recommend downloading the factsheets; https://www.hl.co.uk/funds/leave-it-to-an-expert?clickid=1PPX5i27wxyOTg%3AwUx0Mo3EWUknRBQUKwQqGUU0&iradid=82616&theSource=AFM2M&utm_campaign=AFM2M_IMPR1&ir=1 from the leading stockbroker in the UK. Open each and scroll down to view the relevant split of assets in the asset allocation section. The one thing most investors get wrong most often when investing their money for their selves is asset allocation. The information in the factsheets is, therefore, invaluable.
If you wish, you can just go ahead and invest in these portfolios. Still, you could also use the information under the sections titled “Portfolio’s to ten underlying holdings” and directly invest in the funds yourself as part of your portfolio.
If you would simply like to invest for income without access to the capital, then it is possible to purchase an annuity that will guarantee an income stream. The level of income you will get from buying an annuity will depend on your age and probably your health, but once acquired, you lose the right to access the capital.
Property is not necessarily the best way to get an adequate income. In my opinion, you should be wary of putting all your eggs in the same basket. The yields from buy-to-let investments vary wildly, and you cannot foresee the costs.
Consider diversifying the assets you choose to invest in to not only reduce the risk but also to diversify your income source. The greater the risk posed by your investment, the greater the potential to lose a greater portion of your funds. If you cannot afford to lose any money, then be realistic and settle for the safer assets.