Investing 500k for low risk income

[ChristmasIvy]

Asking for my parents, who are retired and have 500k to invest in order to generate an income for the rest of their lives. They have no mortgage left to pay on their house, so 500k is their savings.
They’ve been thinking of buying and renting out a property but are nervous about the ongoing cost and hassle that could be involved in this. Is there anything else they should be considering?

I would suggest that the first consideration ought to be how much income it is that they need to generate in order to meet their essential spending requirements, and how much they want to generate that would provide a bit more comfort on top of the basics. Until you know what these numbers are it's hard to make meaningful suggestions.

The suitability of any suggestions also depends on what else they have going on in the way of income, assets, etc. so as to ensure that there is maximum tax efficiency. Not paying too much tax is an important component of financial planning, especially where only having a low appetite for risk is going to limit the opportunities for growing capital/generating income. How many years does this money need to provide income for, and can the capital be spent in the end or do they want to leave some available as an inheritance? Are they in good health or likely to need more money later in life to pay for care?

As you are aware, buy-to-let property has its own pros and cons. A well-balanced portfolio of managed funds also has pros and cons but should definitely be considered, with the right tax wrappers being used to make use of their personal allowances going forward.

Thanks so much for your reply.
To provide more background, the house they currently live in was bought by myself (we came up with this plan to allow them to sell their own mortgage-free properly and free up the cash). I also cover monthly bills for them, so effectively they have:
800k from the sale of their house
No other assets or income (apart from state pension)
They’d like to invest around 500k in a rental property (perhaps more if advisable), to generate monthly income for the “extras” (like eating out, clothes, holidays etc) as their basic bills are covered. They want the capital to be preserved and to rise over time to leave as inheritance for me and my sister.
They’ll have the extra 300k in the bank to cover anything unforeseen and to act as a general buffer.
But before they invest in a property, they want to be sure it’s the best thing to do with the money as they are slightly put off by the prospect of ongoing costs/ maintenance.

£300k is a lot to have sitting in cash in the bank over anything more than a short period of time. With interest rates below inflation it is losing its buying power in real terms and it could be working harder.

Assuming that they buy a property close to them, have you done any research into what rental yield they could expect to achieve from their £500k? Would they be better off with 2 or 3 smaller properties to give more flexibility to their plans? To be honest it doesn't sound like they are very keen if they are worried about ongoing costs and maintenance, not to mention dealing with tenants. How hands on do they actually want to be with this? Paying a management company will obviously reduce their net income.

"Best thing to do" is about more than just the hard numbers.

Thank you again. I totally agree that it’s about more than the numbers and I wish we had some other options to discuss... government bonds?! A low risk equity fund? I’m not sure what to advise them. Would a meeting with an IFA be advisable?

I would definitely see a financial adviser. It's too important to guess at what to invest in. As above, they need to go through what income they actually need vs what assets they have with the IFA and make a plan

OP, a meeting with an IFA would certainly be advisable. As I suggested earlier, a well-balanced investment portfolio of managed funds using appropriate tax wrappers (e.g. ISAs, Investment Bonds) is likely to feature in whatever financial plan is eventually put together.

No expert but in my retirement I wouldn't want a hassle of dealing with tenants. There must be better ideas...

Decent IFA advice is needed.

Just off the top of my head...
Was the additional IHT exemption on their private residence considered before they realised the asset into cash?
You are paying their day to day living costs, while assets which will potentially incur IHT are just sitting there in their estate.
Any use being made of annual IHT exemptions for gifts.

It is madness for them to be accumulating more wealth at the next generations expense.

Putting all your eggs in one basket is never a good idea. With the additional taxes on btl, it really is not that simple to make money entering that market now.

...and BTL now very risky. Tenants can move in and pay nothing after month 1 and it is currently 18 months to eviction.

@murbblurb Thanks for that post.
I was able to advise an organisation accordingly, because of your post.

I agree that it is definitely worth seeking financial advice for this scenario and to work out the best solution for your parents. there is a lot to consider, not least the hassle factor of a BTL especially as they get older and they will also be subject to capital gains tax ( if in excess to their annual allowances) when they come to sell the property. A diversified well balanced investment portfolio which is set up to be tax efficient and provide them a regular income could be one solution. Whilst they need some money in cash by keeping too much money in premium bonds or cash leaves them exposed to inflation and the real value of their money being eroded.