How and where to invest £50k to £250k for income

Looking for ISA ideas? We ask experts to suggest a portfolio for four different income seekers.

Baby boomers are leaving the workforce to live their best lives, but many have not saved enough for their retirement. Their objective will be to generate a reliable stream of income from their assets without taking undue risks that leave them susceptible to market corrections – something that those with smaller pots are particularly vulnerable to.

Financial advisers approach generating income in different ways. While some advocate taking the natural dividend yield from a portfolio – 2% to 4% would be a reasonable assumption – others follow a total return strategy, which does not differentiate between dividends and capital value. Again, up to 4% is reasonable to avoid eroding capital too quickly.

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We asked three financial advisers to suggest a portfolio for an income-seeking client – one with £50,000 to invest, one with £100,000 and another with £250,000. We also asked our research team at interactive investor to suggest a portfolio for an income investor with a sustainable mindset.

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£50,000 portfolio

When investing for clients requiring an income, financial adviser First Wealth does not select funds for their income-producing properties. This can be a particularly risky strategy for those with smaller portfolios who want to take a more careful approach.

“Chasing companies that provide high dividend yields can have a detrimental impact on the structure of your portfolio and lead to a skewing towards certain sectors or countries,” says Daniel Evans, First Wealth’s chartered head of technical.

“On the bond side, higher yields are associated with poorer quality bonds, which in turn would impact the defensive characteristics of your portfolio when the market is volatile.”

Instead, First Wealth prioritises total returns and establishes fixed regular withdrawals funded by selling units in the portfolio at an agreed frequency. 

For a medium-risk investor with £50,000 to invest, Evans suggests a globally diversified, index-tracking portfolio that could sustain withdrawals in the region of 3.5% to 4% per year. Crucially for First Wealth, costs are kept low at 0.19% – leaving more capital to fund withdrawals – all the better for smaller pots.

Asset allocation is skewed towards equities at 60%, including 6% in property-related securities, with the remaining 40% in bonds.

First Wealth is committed to being a net-zero carbon business by 2030. It increasingly seeks to invest sustainably, albeit options are more limited for passive investors.

The equity allocations of the suggested portfolio are explicitly environment, social and governance (ESG) screened funds with companies deemed to score poorly being excluded from the indices they track.

£100,000 portfolio

To avoid selling investments each month – something that is extremely detrimental in falling markets – Tom Munro, director of Tom Munro Financial Solutions, suggests holding most of two years’ income requirements in cash.

For an investor seeking £5,000 per year income from a £100,000 portfolio, he recommends holding £8,000 in cash – £5,000 to provide the entire first year’s income and £3,000 as a buffer against volatile markets in year two.

The rest he would split between three passive funds to keep costs low. These have varying risk levels reflected in their increasing equity content, making them suitable for investments with different time horizons – short, medium and long term.

“Each fund is designed to generate returns over the different time horizons – an approach that compliments goal setting as well as cash flow planning,” he says.

The lion’s share of the investment portfolio at £45,000 is put in the lowest-risk fund, Vanguard LifeStrategy 20% Equity, and the smallest allocation at £20,000 in the highest-risk fund, Vanguard LifeStrategy 80% Equity. Somewhere in between is a £27,000 investment in a medium-risk fund, Vanguard LifeStrategy 40% Equity.

Overall, the portfolio and approach would cater for an investor with a balanced risk profile with 60% in equities, 32% in bonds and 8% in cash.

Ensuring enough money cascades down into the two cash pots at regular intervals to meet forthcoming income requirements is done through regular rebalancing across the portfolio.

“Over time, money is disinvested from the longer-term funds down to the 20% equity fund, which in turn tops up the cash pots meeting immediate income needs,” says Munro.

£250,000 portfolio

Ben Yearsley, a director of Shore Financial Planning, suggests a concentrated higher-risk portfolio for an investor with £250,000. Having a bit more capital gives a bigger buffer against stock market volatility, allowing more risk to be taken in the hope of higher rewards.

“One of the most common mistakes investors make is to underestimate their own longevity,” he says. “Very few have a large enough pot to just draw down, therefore they need it to grow. A growing pot needs equities, not bonds.”

He suggests splitting assets equally between 10 funds and investment trusts, predominantly exposed to equities but covering income and growth investment styles and real assets like infrastructure, property and gold.

“Use 7% as a long-term growth assumption, taking 2% to 3% income each year gives the opportunity for income growth as well as capital growth,” he says. “From a risk perspective you don’t need a stupidly high-risk portfolio to achieve this, but you do want to spread risk with different types of investment – size, geography and style.”

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Asset allocation is quite broad with 30% in UK equity funds, 10% Asia, 10% emerging markets and 10% global equities. Another 10% is in BMO Property Growth & Income, which has two-thirds in property-related shares and 10% in Personal Assets, a multi-asset trust which has 38% in equities. The final 20% is split between two infrastructure trusts.

“You’ll notice one non-yielding fund, FSSA Asia Focus,” adds Yearsley. “Just because you need income doesn’t meant every fund or trust has to have a yield; it’s good to have some diversity and different areas included for long-term growth.”

On current yields, the portfolio would generate an income of more than £6,000 in the first year and offer good long-term prospects of capital and income growth.

Sustainable portfolio

Sustainable investors who are seeking an income have more limited choice. “There is still a lack of ethical choices in some fund sectors, such as the equity income sector,” says Dzmitry Lipski, head of fund research at interactive investor.

“This is largely because many ethical funds tend to have higher weightings to healthcare and technology, which are classified as so-called growth sectors. In addition to this, they often have lower weightings to the energy and industrials sectors, which are typically more dividend-paying sectors.

“This makes it a much more restricted universe, and subsequently portfolio biases could have an impact on portfolio performance – something investors should be aware of.”

This will partly be a stylistic bias, but also an ethical, or environmental, social governance (ESG) overlay could lead to a geographical bias towards regions like the UK and Europe, which continue to lead the world in ESG adoption at the exclusion of others – notably emerging markets.

From a diversification perspective, this is something to consider. In addition, selecting funds from a smaller pool with frequent new launches means track records are typically shorter.

It is nevertheless possible to allocate assets to a broad range of ethical or ESG funds to generate a reasonable yield.

Lipski picked out eight active funds that form part of interactive investor’s ACE 40 list of ethical funds. The portfolio has a risk-return profile that is expected to be consistent with an asset allocation to global equities of between 80% and 100%.

“The objective is to focus on income generation as well as investment returns over the long-term, by investing primarily in income assets – mainly dividend-paying equities,” says Lipski.

The portfolio has a weighted cost of 0.84% and a weighted yield of 2.61%. A £200,000 portfolio would generate an annual income of £5,220 on current rates.