Passive income just became a more pressing subject for anyone under 50. This week, the Organisation for Economic Co-operation and Development (OECD) told the UK that reforming the pension triple lock is “necessary to reduce fiscal risks”.
State Pension spending’s set to hit 9% of GDP within 50 years. And for today’s workers, the message is clear: don’t build a retirement around the State Pension surviving intact.
The American answer: Trump accounts
Believe it or not, the US might have the solution. They’re called ‘Trump Accounts’ (because of course they are) and they work like this:
- The US government seeds $1,000 for every eligible baby born between 2025 and 2028.
- Family, friends, and employers can add up to $5,000 a year (with a $2,500 employer sub-limit).
- Money’s invested in low-cost index funds, growing tax-deferred.
- The child takes control at 18, penalty-free for education, a first home, or starting a business.
I think there’s a lot to like about this strategy, but the UK doesn’t have a direct equivalent. Since Child Trust Funds were scrapped, no UK government pays children to invest.
What it does have however, is the Junior ISA. That allows £9,000 a year of contributions with tax-free growth and the same lock-up until the age of 18.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
I’m highly sceptical of the idea that the State Pension will survive until my three-year-old retires. But I’m making moves now to try and make sure he has a source of passive income.
What’s in my son’s JISA?
My son likes climbing, cricket, and motorbikes. But viable investment ideas based around those themes however, are few and far between.
One of the things he owns, however, is a stake in NewRiver REIT (LSE:NRR). It has a dividend yield close to 9% – and I don’t think this is a mirage.
Having to distribute 90% of their income (in exchange for tax-advantages) means real estate investment trusts (REITs) can often have low coverage ratios. But this isn’t the case here.
The dividend per share is currently 6.7p, but underlying funds from operations are 8.3p. For a REIT, that’s unusually solid.
A closer look
The firm targets community shopping centres and retail parks let to essential retailers. The portfolio’s focused on London (which makes up around 43%), major cities, and retail parks.
Debt’s often a key metric with REITs. And NewRiver’s balance sheet looks unproblematic, rather than outstanding. The loan-to-value ratio’s around 40% (the firm targets below 50%). This was helped by £110m of disposals at book value, which is significant for a stock at a price-to-book (P/B) ratio below 1.
Management notes that financing costs are likely to rise as existing debt facilities mature. That’s something investors will need to keep an eye on, especially with long lease contracts.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
The future of the State Pension
Nobody knows whether the State Pension will exist in its current form in 20 or 30 years, let alone 60. This week suggests that betting on it is brave.
One idea is to set up a removal company based around Westminster. As yet another Prime Minister prepares to take charge, that might be a durable business. Otherwise, a well-covered 9% yield compounding quietly inside a tax-free wrapper’s worth thinking about. That’s the direction I’m heading in.
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Stephen Wright does not own shares in any of the companies mentioned.
