How you could create an income from your investments

As the cost of living continues to squeeze the finances of many households, investing for income has become an increasingly attractive prospect.

Indeed, data from interactive investor has revealed that holdings of “fixed income” investments have nearly tripled over the two years to June 2024.

Fixed-income investments, such as bonds and gilts, pay out regular returns as an income.

While growing your money over the long term is likely to remain an important aspect of your investment strategy, fixed-income investments could provide a valuable additional income stream to help with everyday costs – whether you’re retired or still working.

Read on to discover some of the different ways you could create an income from your investments.

Build a steady income from bonds and gilts

Bonds are a way for companies and the government to raise funds – bonds issued by the UK government are called “gilts”.

If you buy a bond, you’re effectively loaning an organisation money in exchange for regular interest payments. When your bond or gilt “matures”, you’ll receive your original investment back.

Bonds may be a good option if you’re seeking a steady income as the “coupon rate” – the rate of interest you receive annually – remains the same for the entire life of the bond. That’s why it’s called a “fixed income”.

While changing interest rates could affect the price of your bond – if interest rates rise, gilt and bond prices usually fall, and vice versa – the coupon stays the same.

If the price of your bond does increase, you could profit from selling it rather than holding it until maturity. You could then reinvest this money in alternative fixed-income assets that may deliver a higher return.

Bear in mind that selling your bond means you will no longer benefit from the interest payments.

Advantages of investing in bonds and gilts for income

• Lower risk – Investing in bonds and gilts typically carries a lower risk than other types of investment, such as stocks. Indeed, gilts are backed by the Treasury which is why they are seen as a relatively “safe” investment – the risk of the government defaulting is very low.
• Tax efficiencies – You can usually withdraw up to 5% of your original investment each year without immediate Income Tax liability, providing an ongoing income. Additionally, gilts are exempt from Capital Gains Tax (CGT), which makes them particularly attractive since the CGT Annual Exempt Amount was cut to £3,000 from 6 April 2024.

Limitations of investing in bonds and gilts for income

• Penalties for early withdrawal – Bonds and gilts typically tie up your money for at least one year and often more. If you choose to withdraw your money before the end of the fixed term, you could forfeit some of the interest you’ve earned. In many cases, you are unable to withdraw early.
• The fixed income you receive may not keep up with inflation – If you hold a bond for several years, the real-term value of your fixed income could be eroded by rising inflation.

Invest in dividend-paying shares

When you buy shares, you’re buying a stake in a business or organisation. The value of your shares could go up or down, depending on the performance of the market and the company.

Some companies choose to pay dividends to their shareholders. This is essentially a share of business profits redistributed to incentivise individuals to keep hold of these shares.

Investing in dividend-paying shares could provide a good way to boost your income. As a shareholder, you’ll usually receive a portion of the profit the business makes – in line with the number of shares you hold – typically several times a year.

You can take your dividends as an income. Or, you could choose to reinvest them into more shares.

Advantages of investing in shares for income

• A regular income – Dividend-paying shares could provide a regular income.
• Capital appreciation – The value of your shares could rise over time.

Limitations of investing in shares for income

• Higher risk – Investing in shares usually carries a higher risk than investing in bonds and gilts. The value of your shares could drop during periods of market volatility.
• Dividends are not guaranteed – Companies may suspend their dividends during difficult markets or trading periods. Some companies may continue to pay dividends during periods when shares fall in value, which could provide you with an income even when the markets are uncertain, but this is not guaranteed.

Generate a rental income from property

Away from the world of shares, bonds, and gilts, investing in property could be an option for generating an income. You can achieve this by renting your property out to a tenant, receiving a regular income in return.

There are many different buy-to-let options to consider, including:

• Holiday lets
• Long-term lets
• Catering to specific market niches, such as student lets.

The most suitable investment for you will depend on the type and location of your property, as well as your income goals.

Some landlords feel that investing in rental property has become less attractive in recent years, due to significant changes in the buy-to-let landscape – such as the introduction of an additional 3% Stamp Duty surcharge in 2016.

Even so, there may still be upsides to putting some of your money in bricks and mortar in 2024 and beyond.

Advantages of investing in rental property for income

• A reliable income – Renting out a property could provide a steady monthly income stream.
• Capital gains – The value of your property could rise over time, so you may benefit from capital gains on your original investment as well as ongoing rental income.
• Peace of mind – Investing in a tangible asset such as property might feel “safer”.

Limitations of investing in rental property for income

• Considerable upfront investment – If you don’t already have a property to rent out, buying and renovating a rental property could involve a significant initial outlay.
• Ongoing commitment of time and money – Keeping a property in prime rental condition typically requires considerable time and expense.
• Tax implications – As a landlord, you are likely to be liable for Income Tax on rent payments, Stamp Duty on your purchase, and CGT when you come to sell your investment.

Get in touch

If you’d like to create an investment portfolio that supports you in reaching your goals, we can help.

Please contact us by email at info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can assist you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.