Income from Capital - Hot Topics Q&A

Q. I have just sold my business and am working there 1-2 days a week for the next year as an associate (self-employed). As the pension schemes have not performed well over the past 5 years plus, what reliable vehicles do you advise for providing a regular income from capital?

A. Firstly, congratulations for selling the business!

By pension schemes I'm assuming you're referring to private pension funds. Whilst I can't give you a definitive answer as I don't know your attitude to risk and full circumstances, I can give some guidance.

1. Deposit Account: the key here is to find an account with a high rate of interest (such as ING). You'll either pay 20/40% tax on the interest, or 0% if you place the account in the name of a non-tax paying spouse.

2. Bonds: here you would be able to invest the lump sum, say £50,000, into a bond and take 5% withdrawals pa free from income tax at this point (although the fund within the bond is taxed). When you cash in the bond/matures (usually after 20 years) there will be a further tax to pay if you are a higher rate taxpayer at the time of maturity (or you can cash it in earlier to time the transaction). Effectively these plans are 'tax deferred'.

3. Equity Income Funds: are collective investments such as unit trusts that invest in well established UK companies, usually across the FTSE 100 or 350. Income is generated by the dividends and you could expect 3-4% gross currently. You should also aim for growth of your original investment
(unlike the deposit account).

4. Purchased Life Annuity: you're probably aware of annuities that you need to purchase with your pension fund. This follows the same process. The big downside is that once you've purchased it you're locked into the annuity so it's not very flexible.

5. National Savings Income Bonds: will pay approx 4.2% gross and the income is taxable.

Whilst this does not list ALL the options, the main ones are here. Naturally you should plan ahead in line with what your objectives are and take the amount of risk that you're comfortable with.

If you've got a question you'd like to ask us just complete the form here and we'll get back to you with an answer (if we publish it we'll keep your name anonymous).