You’re looking for income but you’re also looking for safety. How do you make the most of the money you have in these turbulent economic times? We look at different kinds of investment vehicles and explain how they work and what they could do for you.
What is an annuity?
All the hard-earned money you’ve put away into a pension scheme must now be converted into an income that will last you for the rest of your life. It isn’t just a case of taking all your money out of your pension pot in one go – an annuity is a financial product that turns the lump sum into a regular income for the rest of your life.
Is now a good time to buy or should I wait?
As long as you’re healthy then it’s always a good time to invest in annuities, although rates aren’t what they once were. This is because people are living longer and therefore receiving more payments.
If you’re in good health and can expect to live well in to your 80s or 90s then an annuity’s a good idea. However, if your health is poor and – as morbid as it sounds – you think you may only live another five years, then it may not be for you.
What sort should I go for?
There are various options when it comes to annuities – some involve a degree of risk and others don’t. Which? has a good rundown of annuity types.
This is one area of finance that’s hard to do by yourself so you really need an adviser. Remember that you’re making a very important decision that will affect the rest of your life.
How to shop around
Like any product, you need to check every company on the market to find the best deal. In particular you should check what they’re charging for consultation. Whichever you go for, it needs to be something you’re comfortable with that suits your lifestyle.
You’ll also need to maintain your annuity so that it stays in line with your retirement plans. It’s not a matter of saying “I have £50 a month to put aside” – you need to manage your annuity to ensure you have enough to live on in your golden years.
Be realistic. There are people in their early 50s who think they can retire but when they look closely at the figures they realise that they’re way off. In the past, people would burn themselves out in order to retire at 65, and only live another few years. Now people have more of a life balance and are prepared to work a bit longer in order to enjoy more time in retirement.
Thanks to Pippa Gee of Philippa Gee Wealth Management for her help with this section.
What are gilts?
Gilts are government bonds – they’re loans to the government. They’re similar to corporate bonds except they’re raised by entire governments rather than companies.
In return for this very kind loan from you, the government promises to pay you interest for every year you loan them the money.
How do gilts work?
When you buy a gilt you’re effectively lending money to the government and it promises to pay you a certain amount in interest each year for that loan. The interest is usually fairly low and can look very poor relative to the interest rates you could get on savings bonds.
However, right now gilts look rather good because the Bank of England base rate is so low that the interest we get on ordinary savings is pretty pathetic. Also, unlike savings bonds, which normally last for one to five years each, government bonds can last for decades.
Most gilts are issued for a fixed period of several years. Short-dated gilts are those with a period of up to five years before redemption (the date at which you are repaid), medium-dated are for those between five and fifteen years and above fifteen years the gilt is known as long-dated. However, you don’t have to keep them for all that time. You can buy and sell them on the open market whenever you want.
Should I buy gilts?
Gilts are good for those who are looking for a very safe, fixed income. They’re also helpful if you’re looking for something stable to add to a more adventurous set of investments, so are therefore ideal if you’ve just retired.
Because gilts last such a long time, if you’re thinking of buying into them you have to consider how you think the Bank of England interest rate will move in the future. This is because you could get a nice regular income simply by putting your money into savings accounts with banks or building societies.
If you think base rate is likely to go up and stay up for a while then you could be better off putting your money into savings accounts. However, if you think interest rates could generally go down then a long-term gilt would be a good buy.
If you’re interested in investing in gilts then your next stop should be our complete article on the subject – it’s packed with easy-to-understand information to help you make the right decision.
At this stage of your life you need to be creating a stable savings base. You do have time to invest in more risky, volatile investments that should bring in a decent return year-on-year, but at this point you primarily need stability.
This means that you should be concentrating on putting regular amounts of money (however small) into savings accounts.
What kind of savings account should I go for?
If you’re over 50 then your attitude is most likely to be to risk less than you would have done in your 20s and 30s. Therefore you may want to lean more towards bonds and away from equities.
Make sure you use your ISA allowance! From 6th of April 2017 you have £20,000 of tax-free investment available, so use as much of it as you can. This amount can be split between a cash ISA and a shares ISA however you want. See our essential cash ISA article for more info.
How should I invest my money?
Your best bet is slow investment. The longer the period of investment, the better the return. People tend to be impatient and move money around – buck this trend by giving your investment time to grow.
Any other tips?
Have plenty of cash available so not all your money is tied up in investments. That way if you need cash you have something available without touching or altering your saving plan.
See our article on savings help for over 50s if you’re struggling to find the cash to put away.
Thanks to Louise Oliver of Taylor Oliver Financial Planners for her help with this section
What are high-yield shares?
Part of the profits of certain shares go back to shareholders in the form of dividends (cash payments per share held).
The term ‘yield’ means the yearly dividend income divided by the share price. So high-yield shares are those that have an above-average yield – normally over 5%.
Why choose high-yield shares?
Some people believe that high-yielding shares offer the best investment in terms of total return. If you invest in shares with 10% yield, you should double your investment money in around seven years. However, like most financial products, there’s an element of risk involved.
Should I invest in high-yield shares?
Yield, risk, stability and safety of funds are all factors that you should consider but ultimately you should seek the services of a financial adviser before making a decision.
Property is one of the best investments you can make. The buy-to-let market is very popular and it’s easy to see why.
What does ‘buy to let’ mean?
Is it as easy as it sounds?
In a word, no! However, if you’re prepared to be committed then there’s a very healthy income to be made. Here’s what you need to consider:
- Research: find out if buy-to-let is for you. Ask friends and colleagues about their experiences. You don’t want to go head-first into this if you’re not suited to it.
- Buy in the right area: When looking at houses, put yourself in your prospective tenants’ shoes – would you want to live in the area? You’ll need to be quite cynical and question why a house is very cheap.
- Do your sums: You need to work out how much you’ll need to spend on the property to get it up to standard and calculate how long it’s likely to take to make this money back from rent.
- Shop around for the best mortgage: Use our dedicated mortgage service from London and Country to get the best deal.
- Decide if you want to manage the property yourself: Having a letting agent not only advertise but also manage your property can take a lot of the hassle away. If anything goes wrong in the house then it’s the agent getting calls from tenants, not you. This comes at a cost, of course and depending on how busy you are you may just want to deal with all this yourself.
- Be selective with tenants: A careful screening process is vital – don’t accept the first applicant simply because you want the money coming in immediately. Ask yourself whether you’re happy to have smokers, pets and DSS tenants for instance. Meet applicants yourself and insist on references. Chasing up rent from an unreliable tenant and dealing with neighbours’ complaints can be very stressful.
How much can I make?
It depends on many factors such as the property type and area, but you’ll be looking at anything from £400 a month for a one-bed flat to over £1,000 a month for a family home. Even allowing for costs and mortgage payments, this can be a very lucrative and reliable investment.
A bit of short-term pain will produce better long-term gain. If you’re prepared to spruce the place up a bit then not only will it get snapped up quickly, your tenants are far more likely to respect the property and look after it. You can also justify charging more rent this way.
If you’ve had experience with any of these investments then let us know by commenting below.