Investors should consider investment companies as part of their retirement plans to build a long-term pension portfolio, in light of the increased flexibility of the upcoming pension freedoms, according to the Association of Investment Companies (AIC).
Investment companies present advantages in delivering a higher or growing income in retirement, according to the AIC series Freedom in Pensions.
Income from investment trusts provides a way for private investors to supplement their pensions, and the government’s changes to pensions will increase investors’ choice and flexibility to consider this retirement income route.
James de Sausmarez, director and head of investment trusts at Henderson Global Investors, said, “Investment trusts have long deserved a bigger slice of the pension pie offering. They do not only provide the potential for an excellent means of growing capital while you save for your pension, but can also offer the possibility of a stable and growing income stream in retirement which can survive the peaks and troughs of the market.”
Individuals considering investment trusts should invest on a medium- to long-term basis in order to mitigate the risk involved with equity investing. Since pensions are a long-term investment, a longer-term investment trust is better suited to pension portfolios, the report argues.
Simon Corderly, head of investor relations and business development for F&C Investments, said, “Evidence suggests that, over the long-term, the closed-ended structure can produce better investment returns than open-ended funds. This is because of a combination of gearing, long-term investment horizons and access to illiquid opportunities that open-ended funds have difficulty with as a result of unpredictable inflows and outflows of investors’ capital.
“It is also due to the ability to reserve a proportion of the annual dividend receipts that allows investment trusts to manage their own dividend payments over the investment cycle. Clearly all risks should be assessed and investment suitability needs to be addressed.”
The closed-ended structure of investment trusts provides investors with greater flexibility in converting investment returns into regular income as dividends can be paid out of capital gains or income.
Simon Crinage, head of investment trusts at JP Morgan, said, “We anticipate the budget pensions changes will result in more retirees seeking an investment-led solution. As investment companies have come further into mainstream awareness following the reforms of the Retail Distribution Review, we expect this trend to accelerate further as investors recognise the role that companies can play in delivering income in retirement.”
The pension reforms do not necessarily point to the death of annuities, according to the report, but investors now have greater options in what to do with their retirement savings.
Robin Stoakley, managing director and UK intermediary at Schroder Investment Management, said, “While we do not see this as the death knell for the annuity, which for many will remain an appropriate solution at some stage during retirement, we do expect to see large numbers of investors opt for income drawdown given the potential for enhanced income, continued growth and capital retention.
“The focus will be on outcome-oriented investment solutions, and investment trusts have a strong suit to play with their ability to smooth income payments over time, as well as the potential for long-term capital growth.”
When building a portfolio, advisers should use the best instrument to allocate into the asset class most suitable for the client’s situation. Volatile markets in particular make investment companies an appealing option over open-ended funds.
Jason Hollands, managing director at Bestinvest, said, “Investors considering an investment company need to look at the level of gearing, the ability to trade shares in the investment company, and whether shares are trading at a premium or discount.
“Managers of closed-ended funds have more tools at their disposal. For example, an investment company manager does not need to sell shares and liquidate part of the fund when markets are weak. They can adjust the level of gearing instead.
“Investment companies also provide access to asset classes not offered through open-ended funds, such as infrastructure or private equity.”
