‘How do I invest £1mn so I can be a full-time parent?’

Receiving a lump sum to invest might sound like a positive, but often it is tied to a tragic event that reshapes your life and forces you to make difficult decisions. That is the unfortunate situation James finds himself in.

The 42-year-old’s wife passed away last year, leaving him and two children, aged eight and 10. James has received a significant life insurance payout and now wants to use the money to stop work and become a full-time parent. The sums add up, and after clearing the mortgage, James has just over £1mn on insurance money to invest, from which he wants to generate an annual income to cover his family’s needs.

James has been investing for some time, and he and his wife had built up £670,000 in Isas, pensions and general investment accounts (GIA), which he has now inherited. This was done by “trial and error” with a penchant for investment trusts influenced by Investors’ Chronicle’s John Baron. However, his needs are now different. With the old accounts all focused on long-term growth, the insurance money, he suggests, should be entirely for income. 

“I hope I won’t need to look at the pension, Isa and GIA for 20 years. I do like diversification and have a few pet themes such as private equity and tech, and a degree of geographical selection (UK, EU, EM) but otherwise am happy to leave a fair amount of the investment in global stocks. Although a number of the trusts pay dividends, these will be reinvested since the overall aim is capital appreciation,” James says.

It is of course the insurance money that needs the most attention. James has used his investing knowledge to come up with an income investment plan, again backed by his penchant for investment trusts. However, he is unsure if it’s the right strategy, and is concerned he may be too focused on bonds.

He says: “My proposed plan was selected to produce a mix of equity dividend and savings interest income. On the trusts/ETFs side, I selected well-regarded income-producing stalwarts, plus some geographical dispersion, and [debt-focused trusts] like CVC Income & Growth (CVCG). The key thing is getting an attractive yield over and above the risk-free rate. Some of the choices are riskier, Dunedin Enterprise (DNE) for instance, but I have tried to take educated guesses based on net asset value vs historic levels.

“The funds are much more bond-focused, aimed at paying out my core income. The selections there are slightly less well-researched, but these look like reasonably solid bond options, albeit with a degree of over-diversification?

“I am not sure about the equity income choices: they seem attractive based on yield and I am comfortable with that as I should get capital growth from elsewhere, but I am happy to be persuaded otherwise.”

James is also wary of the “lumpiness” of using capital gains to fund an income.

He hopes to use the natural income from the portfolio for around 10 years, and then gift the remainder to his children as an inheritance from their mother. In the meantime, he will leave the other assets untouched, and eventually use them to fund his retirement.

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES

Ben Yearsley, investment director at Fairview Investing, says:

First off, my condolences on what clearly must be a tough time for you. You want a monthly income of between £4,200 and £5,800 from a £1mn pot and need this for up to 20 years. That’s fairly straightforward. However, there are some limitations of which you should be aware.

It’s challenging getting a smoothed income stream, with April and October often being much larger paying months than many others. If you rely on natural income (dividends) you need to bear that in mind. Next, it makes sense to use the money to fund your Isa every year; the more tax-efficient income you can generate, the longer your pot will last, and the more you can bequeath to your children. You could also be clever and structure your investments so that over time, the higher growth ones sit outside the Isa and the higher income ones within it.

You must be fully aware of how small changes in what you do with your pot can make a huge difference over 20 years: even a small change in the annual growth rate can make a £1.7mn difference. Let’s make a couple of assumptions and take a low, medium, and high level of income of £4,200 a month, £5,000 and £5,800, and use 5 per cent and 8 per cent annual growth estimates before charges. After 20 years the chart right provides a rough idea of what you will have left.

Another factor that you should consider is inflation and the impact of, say, even modest price rises on your buying power. £50,000 in 2024 money will be worth £37,500 in 10 years and almost halves the buying power over 20. You need the income to grow and therefore you need your £1mn pot to grow.

Generating 6 per cent a year (the midpoint of your income requirement) isn’t straightforward. However, it is achievable – just. It’s worth being as tax efficient as possible, so you should hold individual gilts as they provide tax-free growth, and also use your Isa allowance every year. Holding gilts helps reduce annual fees, too.

The Jan 2026 0.125% gilt currently trades at 92.97p, giving a 7.5 per cent tax-free return if you held it until maturity, plus a small income on top of about 0.25 per cent. It’s not exciting, but about 4 per cent each year largely tax-free is a good anchor. I’d put 10 per cent of your pot into this. Depending on which investment platform you use, you might not have any fees to hold gilts. You could buy the 2046 gilt, which trades around 50p, providing 100 per cent tax-free growth over 20 years – this could be a good anchor but [you would need to hold it for a long time and] I’m not going to suggest it for this portfolio.

Moving on, you are making a common mistake – your portfolio is too fiddly. You don’t need 30 holdings; just because it’s a large pot doesn’t mean you need more holdings. Stick to about 15. For simplicity, I am only going to recommend 10, which you could equally weight. You seem to have picked your funds on yield alone. Unfortunately, you cannot generate a sustainable growing income of 6 per cent and get capital growth, so there has to be an element of “cashing in” growth to achieve the desired result. My portfolio above pays out around £50,000 plus the tax-free gilt on top.

Looking at the Isa, pension and GIA, one thing jumps out: you have far too much in bonds. You do not need this amount if you don’t intend to touch the pot for a good decade or more. Like the insurance pot, your portfolios are too fiddly: keep them simple and ditch the tiny holdings. New holdings could include Asian stocks, smaller companies and out-and-out growth funds such as FSSA Asia Focus (GB00BWNGXJ86), Montanaro Global Select (GB00BJRCFN97) and Blue Whale Growth (GB00BD6PG563).

John Moore, investment manager at RBC Brewin Dolphin, says:

Thank you for sharing your story, which is so difficult to manage and plan through on several levels. Before going into the investments, there are some planning aspects to consider. Firstly, is your will up to date and has your expression of wishes for your pension been updated? Also, having left the workplace, have you lost death-in-service benefits too? If so, life assurance is worth considering (either a whole-of-life or a term assurance policy). This could cover essential bills and provide financial stability for the children.

Turning to the investment approach, it makes sense to use the inherited capital for income strain and to leave the rest for the kids.  However, some pragmatism around this will serve well. I understand your approach but the investment strategy is too focused on bonds and specialisation, which by its nature needs more checking and ongoing management than you might appreciate. Many of the infrastructure assets and bonds will correlate more than desired. And while this might feel comfortable as interest rates look to head lower, it is a meaningful style-bet that does not need to be made.

You have a bias away from the US – a massive market to miss, as is Japan which has been in better form of late. I would suggest a more targeted approach to realising the income required while maintaining capital growth in the long term. I would allocate around £210,000 to gilts that trade below par and mature annually. This provides cashflow certainty that helps meet the annual requirements and requires no management.  

The remaining £790,000 should be invested for income and growth with a target yield of 3.75 per cent, to generate a further £30,000. This lower yield means capital growth is much more achievable and you can buy stocks without straying too far away from the cautious asset allocation approach you set out. The £790,000 portfolio can produce a total return of 6.75 per cent, and if this is achieved then after year eight, the nominal value could return to the original capital value of £1mn.

For US exposure, I recommend the JPMorgan American Investment Trust (JAM), which offers a good balance between value and income and has been highly consistent in terms of relative performance. The yield is low, but the income growth record has been impressive. The SPDR S&P US Dividend Aristocrats ETF (USDV) offers a higher yield and more exposure to smaller companies and the value style. For global investment trusts, Murray International Trust (MYI), STS Global Income & Growth Trust (STS) and Scottish American IT (SAIN) focus on pushing up the dividends while retaining investment flexibility and typically focusing on high-quality businesses.

Property doesn’t feature in your list but the current circumstances merit an allocation. With many companies trading on large discounts to their underlying value, active management is likely to add value as the sector consolidates. TR Property (TRY) offers an experienced and active manager, not to mention an attractive yield premium which helps balance off some of the lower yielders like JPM American. I would dismiss Dunedin Enterprise as being too small and specialist and would suggest instead that ICG Enterprise Trust (ICGT) or Abrdn Private Equity Opportunities (APEO) offer an attractive yield and capital growth potential from a large discount, with improvements being made to their portfolio and proposition.

In terms of your GIA, there is scope to have more in stocks and less in bonds. Within the pension, the same points about the US and growth could be made. You should think of the Isa and pension as more tactical in terms of changes as these don’t have the tax issues of the GIA.

Dennis Hall, chartered financial planner at Yellowtail Financial Planning, says:

Looking at the existing portfolios alongside the proposed one, everything appears complicated and at odds with some of your objectives. Some investment truths can be employed to make things simpler. It sounds like you want to use the insurance money to become a full-time parent, not a portfolio manager.

In the first year, your suggested insurance portfolio delivers close to the upper-income estimate. The current 6.3 per cent yield earns £64,815 gross. However, you will later have to draw capital from the portfolio to top up the income. Depending on market conditions withdrawing capital could reduce the portfolio value. 

The amount of income taken each year needs to rise to counter inflation, and this alongside the possibility of a decreasing portfolio may mean the capital needed to top up income also increases. With modest inflation, the portfolio is far from exhausted after 10 years, yet we’ve witnessed how quickly inflation and markets can change, so if things do turn negative the situation is exacerbated. 

To achieve this income you have chosen higher-yielding bonds and stocks, but this will concentrate the portfolio and increase risk. There is a high level of fixed income but over 10-20 years, it’s better to invest in a company rather than lend to it.  

I understand the attraction of a natural income stream but not if you have to increase risk to achieve it. A ‘total return’ strategy that uses capital gains alongside natural income requires more equity exposure than you propose, yet you have sufficient assets to support the higher volatility stock markets bring.

I also question the value of the smaller individual bets on ‘alternatives’ alongside specific market sector funds. Individually none will ‘move the dial’ significantly to make a difference, and collectively they make the portfolio riskier. If you want a portfolio you can buy and hold, and invest in a global equity tracker, the costs are lower and it provides greater diversification.

I’m not ruling out holding individual sectors and I do think private equity has a place – in my portfolio I’ve long held HgCapital Trust (HGT) which has served me well – but would a 2 or 3 per cent holding make a difference? 

Within your pension and Isas, I see a mixture of investments in things such as clean energy and renewables, and then there’s Van Eck Oil Services ETF (0LLF). Is your strategy here to have a foot in every camp?

There has been much research into the factors that determine investment success, and although there’s debate over the actual number, the data shows that the bigger determinant is asset allocation versus stock selection. Get the asset allocation right and then diversify through trackers and possibly a small number of global funds. If you like ‘conviction managers’ you could keep things like Scottish Mortgage (SMT) and also look at funds such as Fundsmith Equity (GB00B41YBW71). Again private equity could be considered, but have a meaningful stake. HgCapital Trust at under 1 per cent of the overall winder portfolio value isn’t going to make much difference.

If the objective is to take time out to raise children, simplify the portfolio and learn to live with the volatility, then keeping 3-5 years of expenditure in cash (you only have 1.5 years at the moment) will reduce the volatility worries and avoid the need to chop and change.