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How to generate an income from your savings
With the right mix of assets you can make 7% a year over the long term, says Mike Deverell of Equilibrium Asset Management.
Say you receive a total return of 8% in a year and require 5% a year to fund your income. Does it make any difference whether you take this from income or capital?
In fact, for non-pension portfolios there is a real tax benefit to taking regular capital withdrawals. You can make capital gains of up to £10,600 in a year without paying capital gains tax.
Say you had a portfolio of £300,000 and made a return of 10%. The gain is £30,000 on the total portfolio; however, you only pay tax on gains you crystallise. For example, if you encashed £110,000, you have only crystallised a capital gain of £10,000.
It is therefore possible to take a very high level of regular capital withdrawals without having to pay tax.
A sensible mix of the above asset classes should be able to generate a total return of over 7% a year on average over the long term.
This level of return should be enough to produce a decent income from a mix of yield and capital, and protect against inflation.
The opinions expressed in this article are those of the author and do not constitute advice.
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