Working out how to invest your money to produce an income can be a challenge, but you may have more options than you realise.

Every year around 400,000 people retire and while some of them have a pension that provides them with a comfortable retirement, many turn to money they’ve invested to boost their income. According to financial advisers, one of the biggest mistakes some people make is that they don't work out in advance how much money they'll need, which means planning to generate income for the shortfall is difficult.


Plan ahead
The key to a successful strategy for producing income in retirement is to plan, plan, plan. You should:

• Work out how much money you’ll need. Write down how much you've spent over a 12 month period.

SAVVY TIP: Louise Oliver from chartered financial planners Taylor Oliver suggests breaking down your expenditure. “Don’t lump together your gas and electricity bills with the amount you spend on holidays. Separate out your everyday expenditure from big purchases so it's easier to work out where you can make cutbacks if you need to.”

• Look at how this might change. Try and work out how much money you’d need if you took more or fewer holidays or if you or your husband/partner became ill and needed hospital care.

SAVVY TIP: It’s impossible to predict what will happen in the future, but your plans need to be flexible enough to cope with change. The more information you have, the easier it is to calculate the shortfall.

• Factor in the effects of inflation. In absolute terms inflation may not seem particularly high especially if you’re old enough to remember inflation at 25% in 1975, but it should not be ignored.

SAVVY TIP: Older people often experience a higher rate of inflation than the average population so you should probably add 1– 2% onto the official rate of inflation.

• Look at your tax situation. If you’re currently a basic rate taxpayer but are teetering on the brink of paying tax at 40%, generating taxable income from your investments may not be the best idea.

SAVVY TIP: Income tax isn’t the only tax to be aware of, there’s also inheritance tax, which you (or rather, your estate) will have to pay at 40% on everything you leave above the IHT threshold of £325,000 (up to £650,000 if you’re married or in a civil partnership). There’s no point in living frugally and hanging onto your capital if 40% of it will disappear after you die.

Put money into savings accounts
Some people get very worried about the idea of digging into their capital but if you don’t need to preserve it, you shouldn’t as it will restrict your options for generating income.

• Put money into a savings account for your living expenses. Set aside enough to cover between two and four years’ expenses.

SAVVY TIP: Split this between several banks and building societies so that your money is always covered by the Financial Services Compensation Scheme, which would pay out if your bank or building society fails. There's more about keeping your bank savings safe elsewhere in this section.

• Draw down this money as you need it. Don’t have more money sitting in your current account than you need as it probably won’t earn hardly any interest.

Your investment strategy
Unless you’re comfortable managing your own finances, it’s best to get advice from an independent financial adviser (IFA), preferably one who charges a fee rather than taking a commission from the products she or he recommends. Read more about finding an IFA you can trust.

• Work out how much you need over the next few years. As you’ll be using up your savings, talk through, with your adviser, how much of your money you should invest to produce a return over the next three or five years.

• Look at tax-free investments. If you haven’t used up your ISA allowance, which is £10,200 a year.

SAVVY TIP: Don't invest in something just to get the tax-free return. Make sure you understand how much risk you're taking on. There's no point putting all your money into shares if you don't want to take risk.

• Don’t ignore growth producing investments. It may seem odd to talk about investing in products designed to grow in value when you want income, but you can use your capital gains tax allowance to do just that. This means you can invest in unit trusts, OEICS or investment trusts.

SAVVY TIP: By doing this, says Saran Allott-Davey of Heron House Financial Management, you can generate tax-free returns. “Your capital gains tax allowance is currently worth £10,100 a year and you can take profit – or gains – from your investments without paying tax.”

SAVVY HELP: Karen Ritchie, an independent financial adviser with F-P-W is one of SavvyWoman’s panel of experts. Why not ask Karen a question about investing by clicking here?