Living solely off the State Pension in retirement is a challenging task. It amounts to just £8,767 per year, so generating a second income is likely to be a necessity for a wide range of people across the UK.
Of course, obtaining a passive income is not necessarily a straightforward process. There are a wide range of options that include shares, bonds, property and other asset classes.
Here are three potential options that could offer relatively high income returns, while also providing inflation protection through their long-term growth potential.
Tracker funds
Funds that aim to track a specific index, such as the FTSE 100, can provide a simple and effective means of generating an income return. The FTSE 100, for example, has a dividend yield of around 4.5% at the present time, which is three times the best available returns on a Cash ISA and well ahead of inflation.
One of the main advantages of a tracker fund is its low cost. It is highly accessible for a wide range of investors, with fees having fallen significantly in recent years so that they amount to less than 0.2% per year in many cases.
Although there is scope for a tracker fund to underperform the index it is seeking to follow, the diversity it provides means that overall risks facing investors are relatively low compared to gaining exposure to a limited number of stocks.
Income funds
Income funds may provide a superior level of income when compared to a tracker fund. They focus on investments that provide the best possible income prospects, while also seeking to deliver growth that matches or beats inflation over the long term.
Of course, income funds generally charge higher fees than tracker funds. This is because the cost of running them is much higher, with a team of fund managers and analysts being employed to research the various opportunities that are available.
As such, it may be the case that some income funds are not worth the extra costs they incur. But with there being a variety of options available within this space, some funds may prove to be appealing to income-seeking investors.
Shares
With there being a wide variety of FTSE 100 and FTSE 250 stocks that offer yields in excess of 5% at the present time, it is possible for an investor to build a portfolio of stocks that delivers a high income return.
Since the cost of buying shares has fallen in recent years, and features such as regular investing are becoming more widely available, buying a range of companies in different sectors may not be hugely expensive.
Buying dividend stocks provides an investor with the chance to pick the best-value shares within an index, as well as those companies that have the highest long-term growth potential. As such, it may be possible to obtain a relatively high return, while managing risk through diversification.
