There are situations when conventional wisdom cannot always be applied to a given investment situation. One example I have experienced recently is where elderly clients sold a property and required the same level of income as before. Naturally, at that stage in their lives they required minimal risk.
All well and good, but interest rates are low, inflation is nearing zero and possibly we are moving towards deflation. Therefore, the perceived wisdom that risk has to be reduced and finally eradicated as people grow older has gone out of the window. This approach was OK a few years ago, but now it is a recipe for severely restricted income and gradual capital erosion. So what can we do? The solution, after exploring the nil risk option, is to break away from conventional wisdom and seek to create a longer term outcome via higher yielding investments. But, as we all know, higher yield means… higher risk.
Probably the most appropriate action is firstly to discuss the issue with all of the immediate family present. It should be pointed out that mum and dad could receive their target income, but only by investing in high-yielding assets that did encompass market risk. The potential “time risk” could be mollified by suggesting that the assets should be perceived as a long-term investment – i.e. the parents would be ‘custodians’, but the children themselves would be ultimate owners. The children may be amenable to the idea of in specie transfers on death and the logic behind the strategy (i.e. mum and dad are investing the assets in effect for the children, whilst at the same time receiving their target income).
Obviously, a lot of care has to be taken in treading this path and it is essential that all options are presented. Nevertheless, one other thing to bear in mind is that the children might be retired by the time this ultimate situation takes effect and they might need the income!
Investments to consider:-
- Infrastructure funds (especially via *ISAs)
- Short Term Debt Finance instruments
- Income Unit Trusts
- High yielding bond funds
- Investment Trusts
*Another huge advantage in this respect is that certain ISA investments produce entirely tax free income and furthermore can be transferred to the surviving spouse within an ISA.