24/03/225 effective ways to turn a lump sum into a passive income
Finding a way to create a passive income can give you more financial freedom and complement to your other sources of income. And, if you have a lump sum, there’s more than one way you can do it.
A passive income is an income that requires minimal work to maintain. This means you’ll have an income without having to work in the traditional sense. If you have a lump sum that you aren’t sure what to do with, finding a way to turn it into a passive income can help your money work harder and improve your financial resilience.
There are many reasons you may have a lump sum that you’re ready to turn into a passive income, including:
- Excess savings
- Disposal of assets
- A redundancy payment.
If you have a lump sum that isn’t currently helping you towards your goals, here are five ways you could turn it into a passive income.
1. Purchase a buy-to-let property
Buying a property to let out is a common way to create a passive income. If you have enough, using a lump sum to buy a property or act as a deposit if you need a mortgage means you can receive an income from the rental yield.
According to the Office for National Statistics, private rental prices paid by tenants in the UK increased by 1.8% in the 12 months to December 2021. The rising cost suggests that there is strong demand for rental properties, but this will vary significantly between locations. As well as letting to a tenant, you may also want to consider holiday homes that you can let out.
However, if you want a completely hands-off approach, keep in mind that you will need to pay an agent to manage the property for you, which will affect the income you receive. There will be times when you will have to pay out to maintain or repair the property, and there may also be periods when the property is empty and not delivering an income.
2. Invest in a fund
Investing provides an opportunity for your money to grow, and you could use the returns to create an income. A fund pools your money with other people’s to invest in a range of different businesses. A fund will either track a market index or a fund manager will make investment decisions for you. So, day-to-day you won’t need to make decisions about your investments.
If you’re thinking about investing your lump sum, keep in mind that investment performance will affect income. If investments have performed poorly, you would need to sell more units to achieve the same income. All investments carry some level of risk and it’s important to understand how much risk is appropriate for you and your goals.
3. Invest in dividend-paying stocks
As well as investing to sell stocks for a profit, you can also invest in dividend-paying stocks.
These stocks will pay out regular dividends and are usually well-established companies that have a track record of giving some of their profits back to shareholders. Dividends may pay out as cash or in the form of additional stock. If you want to create a passive income, you should choose a stock that pays out dividends on a regular basis, such as quarterly or annually.
A company’s board of directors is responsible for dividend distributions. There may be times when they decide to lower or suspend dividends.
4. Purchase bonds
A bond is a type of loan agreement made between an investor and borrower. A bond will detail how much has been loaned, the repayments, and the interest due. You may purchase bonds issued by companies and governments. As an investor, the repayments made on a bond can help you create a passive income.
While bonds generally present less risk than investing in the stock market, they still have some. A borrower may default on the bond, which would affect your income and may mean you lose money. If you’re thinking about purchasing a bond, you should carry out research and consider how it would fit into your risk profile.
5. Purchase an annuity
An annuity is often associated with pensions and retirement. But you can use a lump sum to purchase an annuity and create another income stream too.
You purchase an annuity with a lump sum, and it will then deliver a regular income for either a defined period or the rest of your life. If you choose, an annuity can be linked to inflation to maintain your spending power over the long term, or provide an income for your partner if you pass away. As an annuity provides a reliable income, it can offer peace of mind.
How much an annuity pays will depend on the rate offered. The annuity rate can be affected by many factors, including your age, health, and lifestyle, as well as wider market conditions. You should shop around to find an annuity that suits your needs and offers a competitive rate.
Usually, annuities are purchased at age 55 or later. You should keep in mind that purchasing an annunity cannot be reversed in the vast majority of cases before you proceed.
Creating a passive income as part of your financial plan
The above list includes just five examples of how to turn a lump sum into a passive income, but there may be other options that make sense for you. If you have a lump sum and want to discuss how to use it, please contact us.
We’ll help you understand how you could create a passive income, and how to do so in a tax-efficient way as part of your overall financial plan. Using a lump sum in a way that makes sense for you can provide you with more freedom and confidence.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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. The Financial Conduct Authority does not regulate Buy to Let Mortgages.