Focus falls on investment-based retirement income solutions

This article is part of
Income Options - November 2014


Retirees were handed far greater control and flexibility over their pension savings, allowing them to move away from the limited number of income choices they had for retirement. Importantly, the announcements opened up the possibility of a greater number of people keeping their retirement savings in investment-backed vehicles, delivering the chance of continued growth of their pension pots into retirement.

“It has been a welcome change and offers people all the benefits associated with maintaining exposure to the markets,” says Nathan Sweeney, a Senior Investment Manager for Architas Multi-Manager. “Previously, with annuities, there was a regular income payment, but there was no opportunity for that money to grow. Having that capacity is all the more important, as life expectancies are increasing and the cost of living and the eroding force of inflation becomes more of an issue.”

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The changes have provided a catalyst for the industry to focus on income-generating investment solutions, particularly those that offer a monthly payment, which serves to replace the salary the individual gives up in the move from work to retirement. For Architas, it has led to a continuation of their focus on aiming to generating strong risk-adjusted returns, with an attractive yield.

“We believe there are a number of key income opportunities for 2015,” Mr Sweeney continues. “Within equities, we think US equities are potentially set to perform well, particularly as the market is dominated by large, safe income producers. In times of uncertainty, with heightened geopolitical risk and volatility, money tends to flow into those types of low-risk companies. By this same token, the UK could also stand to benefit as it is considered a large liquid market with a vast array of dividend distributing companies. In fact the UK stock market pays a higher dividend than any other equity market.

“Meanwhile, in the fixed income space we think long-dated sovereign bonds – for example, 30-year inflation-linked bonds – will start to look attractive in 2015. The yields from these investments look likely to potentially increase as interest rates rise and this could be a good entry point into the asset class for low risk income hungry investors.

“Elsewhere, commercial property, particularly in the UK, is continuing to offer an attractive yield and fundamentals remain robust, we also like alternatives such as infrastructure. As some segments within the fixed income universe start to look more expensive, then alternative assets may be explored further as a way of increasing diversification and potentially boosting performance.”

Overall, 2015 is set to be an interesting and productive time for income investors, with providers anticipating higher inflows into income funds, complemented by a range of opportunities for savvy investment managers who may be able to maximise returns while keeping risk under control. The announcements in the Budget acted as a catalyst for change, with quality multi-managers such as Architas well-placed to give retirees an investment-based solution to their long-term income needs.