Investing retirement income: it’s a balancing act
A growing number of retirees are now investing for income on their own, but as with any investment, it is essential to achieve the right balance
Under the new pension freedoms that were introduced last month, anyone over 55 can take control of their savings and manage them how they want. Investment income can make the difference between merely getting by and having a very comfortable retirement – but how can you be sure that you have enough money to enjoy the latter? Where should you invest your cash to be sure of a decent income that should sustain you through your retirement years? Annuity rates are near record lows. So a growing number of retirees are making the most of the new pension rules and investing for income on their own. Somebody who is taking pension benefits at the age of 65 could conceivably remain invested for another 30 years or more, so it is essential to consider how to generate an income, says Patrick Connolly, who is a certified financial planner at the advisers Chase de Vere. “Gone are the days when people automatically reduce their risks as they approach retirement and then avoid risks entirely once they start taking their pension benefits,” he says. Almost all investments can generate some income. Equities pay dividends, cash and bonds pay interest and property can pay a rental income. What’s more, if you take just the yield paid by the funds and avoid selling units to generate more cash, your capital should grow over the long term, although your initial income will be less than you would get from an annuity. But as with any investment, it is essential to achieve the right balance. If you are too cautious, your savings may not achieve a high enough income to meet your needs. Be too adventurous, with too much in equities or property, for example, and your savings may be more exposed to the effect of downturns. Lloyd Harris, a fixed-income fund manager at Old Mutual Global Investors, says bonds, and in particular corporate bonds, can offer a solid, dependable income at lower volatility and risk than equities. What’s more, they offer the potential for higher yields. “The bonds we invest in are typically blue-chip companies and household names such as Apple, Volkswagen, Prudential and Lloyds Bank.” These companies offer a low risk profile and a dependable return, says Mr Harris. “The inflation outlook and growth outlook are benign – a positive environment for bond returns. The implied default rate is much greater than the actual default rate of bonds, therefore we are getting paid well for the risk we take.” Being in sterling helps as well, says Mr Harris. “We get paid more for our risk in sterling than we do in other currencies, especially euros – so for sterling fixed-income investors like ourselves, we are arguably in a better position than many other developed nations.”
A growing number of retirees are now investing for income on their own, but as with any investment, it is essential to achieve the right balance
Under the new pension freedoms that were introduced last month, anyone over 55 can take control of their savings and manage them how they want. Investment income can make the difference between merely getting by and having a very comfortable retirement – but how can you be sure that you have enough money to enjoy the latter? Where should you invest your cash to be sure of a decent income that should sustain you through your retirement years? Annuity rates are near record lows. So a growing number of retirees are making the most of the new pension rules and investing for income on their own. Somebody who is taking pension benefits at the age of 65 could conceivably remain invested for another 30 years or more, so it is essential to consider how to generate an income, says Patrick Connolly, who is a certified financial planner at the advisers Chase de Vere. “Gone are the days when people automatically reduce their risks as they approach retirement and then avoid risks entirely once they start taking their pension benefits,” he says. Almost all investments can generate some income. Equities pay dividends, cash and bonds pay interest and property can pay a rental income. What’s more, if you take just the yield paid by the funds and avoid selling units to generate more cash, your capital should grow over the long term, although your initial income will be less than you would get from an annuity. But as with any investment, it is essential to achieve the right balance. If you are too cautious, your savings may not achieve a high enough income to meet your needs. Be too adventurous, with too much in equities or property, for example, and your savings may be more exposed to the effect of downturns. Lloyd Harris, a fixed-income fund manager at Old Mutual Global Investors, says bonds, and in particular corporate bonds, can offer a solid, dependable income at lower volatility and risk than equities. What’s more, they offer the potential for higher yields. “The bonds we invest in are typically blue-chip companies and household names such as Apple, Volkswagen, Prudential and Lloyds Bank.” These companies offer a low risk profile and a dependable return, says Mr Harris. “The inflation outlook and growth outlook are benign – a positive environment for bond returns. The implied default rate is much greater than the actual default rate of bonds, therefore we are getting paid well for the risk we take.” Being in sterling helps as well, says Mr Harris. “We get paid more for our risk in sterling than we do in other currencies, especially euros – so for sterling fixed-income investors like ourselves, we are arguably in a better position than many other developed nations.”
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