How can I generate monthly income from a £195,000 lump sum?

A reader asks: I am due to retire early on 30 Apr 2026. I will get a pension but have taken the largest lump sum offer I could as it is completely tax free. I want to supplement my lower pension with interest from a £195,000 initial investment. What is the best rate for me to get a monthly income from this lump sum please? I’m guessing it will be through bonds/investment/shares but just wanted a view please. I would have a medium attitude to risk.

Congratulations on your forthcoming retirement. Your pension pot is the culmination of a lot of hard work and saving, so it is important that it now funds your lifestyle in retirement. To that end, you are keen to draw a monthly income from this £195,000 sum.

There are two major factors to consider here. The first is longevity risk, that is the potential for you to run out of money from your pension. The second is sequencing risk, which is when long term returns are compromised by the need to draw an income from your investments during potential downturns early in retirement.

James Coker, investment manager at wealth firm Quilter Cheviot, says both of these factors “should guide you to drawing on natural income as much as possible, supplemented by assumed capital growth over the long-term”.

Natural income here refers to interest and dividends. To achieve this, you should aim for a total return to be, at a minimum, the level of your withdrawal rate. This requires an investment in equities, which have returned above inflation over long time periods.

Coker says: “With a ‘medium’ attitude to risk you should aim for approximately 65% within equities. This allocation can be tilted towards higher income producing sectors like, mining, tobacco, financials, and industrials, and geographies such as the UK, Asia, and Emerging Markets.”

To save on dealing costs and to enhance diversification, Coker recommends investing via funds rather than picking individual stocks. Some funds Coker likes, and that are geared towards income generation as well as capital growth, which is what you need, include:

• Artemis Income
• Blackrock European Income
• Prusik Asian Equity Income
• Pacific North of South Emerging Markets
• JP Morgan Global Growth & Income
• Redwheel Global Equity Income.

It is worth bearing in mind, however, that your pursuit of income will almost certainly draw you away from the US market.

Coker explains: “The US market provides access to some of the fastest growing global companies. The drawback is that a lot of this growth is reinvested back into the companies rather than distributed as a dividend.”

Nevertheless, a considered total return approach would seek even a modest US allocation. This, Coker points out, could be achieved via an inexpensive tracker fund such as the HSBC S&P 500 tracker.

After a 65% allocation to equities, to provide ballast against risk and diversification of income source, Coker would consider approximately 20% in bonds and the remaining 15% in alternative assets as appropriate.

He says: “The alternatives encompass a broad church on non-traditional assets, but for the sake of income and risk management I would allocate to investment trusts linked to property – London Metric, British Land, and Primary Healthcare Properties) – and infrastructure – HICL, Pantheon Infrastructure, 3IN.”

Further risk mitigating enhancements can be found within hedge funds like BH Macro, Coker says, though hedge funds do not often pay a generous dividend, if at all.

Within fixed income, a combination of sovereign debt, like UK gilts, and corporate credit funds will produce a healthy and reliable income stream.

“If you are an active investor you can pick up high coupon Gilt issues, which will be isolated from income tax within your pension. If you would prefer to use a fund, then the Allianz Gilt fund is a measured choice,” Coker says.

Corporate credit comes with higher risk than sovereign debt, but the benefit is higher returns. Direct corporate debt investment is difficult for private investors, so Coker recommends gaining exposure via Royal London’s Sterling Credit fund.