Creating a passive income from £300k while daughter establishes performing arts career?

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Our daughter (22) is in her final year of drama school and will emerge next autumn into a highly competitive, notoriously underpaid industry where the odds of success are low!

However, she's extremely fortunate to have an inheritance 'pot' of c. £300k as a result of her grandparents' deaths. It's currently held in shared property (about to be sold), S&S ISAs (mostly global index tracker funds), and fixed-rate savings accounts.

She's very sensible and level-headed about money, and we've already talked about how to make this money 'work for her' to support her so she can commit time to establish her career and only have to work part-time. She will also be able to live at home if she wants to save rent in the early phase.

Any thoughts on the best way to generate a small income from this without reducing the capital value too much?

We're already wondering whether she should start a pension, even if she doesn't earn enough to put in more than the bare minimum?

As a pp said, with £300k a passive income of £15-20k should be easily attainable. Depending on how much risk she wants to take with the capital, I´d look at a portfolio with a mix of quality bonds, income funds, and individual high yielding shares, and maybe keep some in easy-access cash in case there is a sudden big expense such as establishing herself in a new city where she has to fork out rent before any pay trickles through.

There are several FTSE-100 companies paying fairly sustainable dividend yields over 7% (HSBC is one, M&G and Aviva are two more), and a few more in the FTSE-250 pushing 10% (abrdn pays 8.78% at the moment, Phoenix Group Holdings 9.3%) but that would be a financials-heavy portfolio. Next Energy Solar Fund pays 8.5%. (Disclosure - I have positions in all of these except Aviva because they´re shit as an insurer). On paper Vodafone looks like a big dividend, but they are going to halve it.

I´d strongly suggest reading articles on the Motley Fool UK, as their philosophy there is largely about investment for passive income.

She needs to shelter as much as she can in ISAs not just to shield the income from tax, but to shield the capital from CGT if it grows and/or she doesn´t take all the income but can reinvest it. If she is earning very little taxable income she could keep some of the money as cash and use up her Starting Rate for Savings as well as the £1000 allowance for bank interest and her personal allowance.

On pensions - she can claim tax relief on up to £3600 each tax year even if she is not a taxpayer, so she puts £2880 into a SIPP and the SIPP provider claims £720 from HMRC on her behalf. Definitely worth doing this for the tax relief, but no point paying any more in if she needs passive income now. I´d suggest investing the pension money in long term growth stocks: F&C Investment Trust is a good one, as is Scottish Mortgage Investment Trust (again - for disclosure I own both of these too) which would give her exposure to a wide range of assets.

It looks like you´ve discounted the idea of your DD buying property. That´s good, because it´s a stupid idea.

Thank you for this - extremely helpful, and the sort of discussion I was hoping for!

You´re very welcome OP. Glad to be useful.

One thing I forgot to mention but is also worth thinking about when living off passive income is cash-flow. By and large dividends are paid out quarterly at the most, and often twice yearly or even just once a year. Your DD, when choosing what to invest in, might want to think about this and not have everything arriving in clusters. Many income funds pay out monthly and although the returns will be lower it´s probably worth having some come in fairly regularly.

This could also help bring some income forward into this tax year to better use her personal allowance for 24-25.

How to find advice about this please? I have money invested in instant access accounts and need to get a better return. Sorry to hijack the thread.

How financially literate are you? I'm not sure where to start as personally I've been exposed to finance concepts since university and I'm sure these could sound very daunting to a beginner. Maybe you can try taking a look on investopedia?

Do you have a relationship manager at your bank who could help you? They charge higher fees but offer a wide range of products that will suit different risk appetites.

I don’t know a huge amount! I bank with an internet bank so have no personal relationship with them . Just don’t know where to start.

I would get her to try and write a business plan using realistic scenarios re what her income/costs are likely to be over the next 5 or so years. If living at home rent free is an option, I would be keen that she doesn’t touch the inheritance yet and only did so if she needed it for accommodation costs later down the line otherwise she will risk depleting it quickly. Part time work would still give plenty of time to focus on her acting while making sure she was making an NI contribution (this is also going to be really important for her future). I would expect her to be doing at least enough to be making an NI contribution.

If she’s not doing panto or some form of seasonal work over Christmas then picking up temporary retail work seems sensible while it is possible and available and would give her a buffer while not much else is happening.

Minimising tax is going to be important so getting some of the money in a stocks and share isa asap is going to be important as would potentially considering premium bonds. However, It’s going to take a long time to get that sum into isas so she needs to be very conscious about how she’s going to do it and the tax implications. Early days that might not matter so much if she isn’t earning but it will sting paying tax on the income from investments.Eg say she earns 12.5k a year in part time work, she’s going to need to be paying tax on the income from investments. She will also need to think about what she’s invested in as detangling accumulation funds is a pain.

So if she’s getting dividends, shed be paying 8.5% as a basic rate tax payer at the moment. I suspect the budget will change this as well to make it less favourable. She will also need to think about capital gains on anything outside of an ISA of 20% so it is something you’re going to need to plan carefully for. Don’t underestimate how the tax implications might reduce down any passive income she’ll be able to draw.

I would also echo the pension points. £3600 now has 40 years plus to grow. That could be worth 60k in 40 years time assuming 7%. If she’s not going to get a steady income for a while early contributions could be incredibly important.

As well as investing the money, as @InveterateWineDrinker has outlined, can she get casual work in the industry?

Even jobs like theatre hospitality, stage crew, security etc? Partly because it will earn her money but also to increase her contact network. DP works behind the scenes in various 'entertainment' sectors and a lot of the work he's picked up has just from being in the right place at the right time meeting people while working and it's snowballed so now he has regular work from several companies that overall pays him a decent income and he's still meeting new people who he could work for.

A lot of it can be short notice, often less than a week in advance, so she can just take this sort of work when she's not doing something in her main career. Get her to find out who employs the people in theatres, TV or wherever in these sorts of roles, it's often middlemen who supply casual staff on an adhoc basis so she could sign up with a few places.