Pensions  

Built for income - how to fund a long term retirement

This article is part of
Retirement Freedom and Responsibility - March 2015

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The harsh reality is that if your client’s money is sitting in a bank account, its value is probably shrinking in real terms. With interest rates stuck at record lows of 0.5%, retirees are unlikely to be able to use this as a means to sufficiently supplement their pension.

A key issue for income-hungry retirees is how they can obtain a decent, long-term level of income after they finish working, which has the potential to last the duration of their retirement. Of course, the traditional annuity, with its advantage of offering a guaranteed income, will still be the preferred option for many, but current low interest rates mean lower annuity rates, and more investors are expected to consider other income investment options that have the potential to offer better value for money.

We believe that multi-asset income investing can offer an alternative income solution for retirees. We take the view that in the same way that investors use different assets for long-term growth when they are accumulating a retirement fund, investors should utilise long-term income assets when they are deaccumulating and aiming to receive a long-term income from their drawdown fund. Premier Multi-Asset Distribution Fund and Premier Multi-Asset Monthly Income Fund both have a very strong focus on delivering a good income stream for investors and invest in a variety of different assets chosen for their potential to pay a regular and sustainable income.

In addition, they also offer the potential for long-term capital growth which could be useful for retirees who wish to pass on their wealth to their beneficiaries when they die, or use the funds to cover long-term care fees in the latter stage of their retirement. Additionally, unlike an annuity, a multi-asset income fund provides the flexibility for investors to access their money at any time should circumstances change.

For income investors, understanding the potential volatility of their income is likely to be more important than volatility or loss of capital. Providing the income continues to be paid, it is probably of less importance to retirees if their capital experiences short or medium term fluctuations. Diversified income portfolios ensure that investors are not overly reliant on a single asset or fund to perform to provide an income stream.

Importantly, our multi-asset income funds pay natural income, which means they distribute all the income generated “naturally” by the underlying funds and their investments, in the form of dividends per share. Investors receive their income from the shares they own without having to cash-in any of their investment, also allowing them to capitalise on future dividends per share and any increase in the share price. Income can fluctuate over time but no shares have to be cashed-in.

Cashing-in shares or units instead could present significant challenges. Poor returns in the early period after retirement can cause significant damage to a portfolio, even if they are followed by good returns. Once cash is flowing out to pay the income, it may not be enough for returns to average out in the long-run to keep paying the income needed.