Spiralling household expenses have led to some DIY investors selling assets to bridge the gap. Depleting your investment portfolio could help you meet income needs now, but you also need to consider how sustainable it is and whether it’ll affect long-term plans.

According to research from EQ, 44% of DIY investors have cashed in investments as the cost of living rises.

Inflation is much higher than it has been in recent years – in the 12 months to September 2022, it was 10.1%. So, it makes sense that families are now looking for ways to boost their income.

Unsurprisingly, this approach is also more common among younger generations, who are more likely to face financial insecurity.

While selling some of your investments could provide a welcomed cash injection, it may not be the right solution.

Ideally, you should start investing with a long-term time frame in mind and have an emergency fund to fall back on before you invest.

If you’re thinking about accessing investments sooner than anticipated, here are three things you need to consider first.

1. Are your withdrawals from your portfolio sustainable?

If you need the extra income now, selling some assets can make sense. However, keep in mind that the Bank of England expects high levels of inflation to remain in the coming months and prices may not fall once the period of high inflation is over.

Depleting your investments without thinking about your long-term income could leave you with a bigger gap to bridge in the future.

You should consider how long you may need to use your investments to boost your income and what is sustainable.

2. Will depleting your investment affect your long-term plans?

When you started investing, what was your goal? Could selling some of your investments now mean you can no longer reach that goal?

In some cases, compromising may make sense, but it may not be something you want to do, or it could affect long-term security. For example, if you’d been investing for retirement, could taking an income now mean you need to work longer? Or that you could run out of money later in life?

Looking at the decisions you make now in a wider context can help you balance short- and long-term needs.

3. Could investment withdrawals mean you face a larger tax bill than you expect?

In some cases, you need to pay Capital Gains Tax (CGT) when selling assets for a profit, including shares. It’s important to understand how your tax liability could be affected so you don’t face an unexpected bill.

For the 2022/23 tax year, the CGT allowance is £12,300 for individuals. If the profit you make from selling investments is below this, you will not need to pay CGT.

Spreading out disposing of assets across several years can make sense to maximise the CGT allowance. You may also choose to plan with your partner to make use of both of your CGT allowances.

The rate of CGT you’d pay will depend on your Income Tax band and other circumstances. However, it can be as high as 20% for investments and significantly reduce your income.

If you hold shares in a Stocks and Shares ISA, you don’t need to pay CGT on the gains you make.

Investors are making changes to their portfolios too

The EQ research found that investors aren’t just selling shares to boost their income. Some are making changes to their portfolio.

In a bid to get the most out of their money, a third of investors said they had divested from ethical stocks in search of greater returns.

There are reasons to make changes to your investments, but it’s important that you consider your goals and risk profile when doing so, rather than making knee-jerk decisions in response to economic circumstances.

Usually, investments that could potentially deliver higher returns also come with a higher level of risk. Chasing returns without thinking about risk could mean you take more than is appropriate for you. This could harm your financial security and mean your investments are more likely to experience volatility.

You should keep in mind that investment values can fall.

Contact us to talk about your investments and the effect of the cost of living crisis

If you’re worried about what the cost of living crisis means for you or have questions about whether you should change your investment strategy, please contact us. We can help you balance financial challenges now with your long-term goals and provide you with confidence about the decisions you make.

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 investment 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.