How income funds are gearing up for retirement

    How income funds are gearing up for retirement

    One of the proposals announced by chancellor George Osborne in his 2014 Budget was the granting of greater freedom to retirees when accessing their pension pots.

    In particular the compulsion on savers to purchase an annuity was put to an end.

    The motivation behind this included the perceived opacity, costs and lack of genuine choice associated with annuities.

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    In addition, the returns from annuities have fallen over the last couple of decades, due to the decline in government bond yields over the same period (although with annuities the income is guaranteed for the rest of the investor’s life).

    Some people have sought to replace or supplement annuity investment with direct exposure to property, with the rent received from the property providing an ongoing income and then hopefully a capital gain at the end when the property is sold.

    With the episodes of residential property price falls that have been seen in the UK, however, such investments are not guaranteed.

    Also, property does not provide the flexibility to access capital quickly, should it be needed at any point i.e. it is quite illiquid - or not ‘readily realisable’ in Ucits terms.

    Annuities and property also suffer from the risk of investing in only a single asset class i.e. concentrating risk or ‘putting all of your eggs in one basket’.

    As a result of this and the other disadvantages mentioned above, more people are starting to look at income funds as a retirement option, in particular multi-asset income funds.

    The market

    The investment and fund market, in the UK at least, has been geared for much of the past 50 years more towards the accumulation rather than the decumulation phase of the investor’s lifecycle.

    Specifically this has been a cultural shift with wealth accumulation more in sharp relief than wealth maintenance.

    With government granting greater access to pension pots, however, plus the continuing shift in demographics to an older population that the UK (and other countries) has seen, this is changing.

    Since Pensions Freedom became reality in April 2015, pension beneficiaries have withdrawn more that £2bn from their pots.

    Also, more people are phasing their retirement while some are even going back to work later in life.

    Looking at recent numbers from the Investment Association (IA) shows some signs of an increase in decumulation-orientated investing happening.

    In the 13 months to August 2015 (the most recent IA monthly numbers currently available), UK Equity Income was the best-selling IA sector on a net retail basis in eight of those months (with one fund dominating gross sales) and Targeted Absolute Return, the other sector most associated with the in-retirement phase, in two of the months.

    On a quarterly basis, UK Equity Income was the best-selling IA sector in three of the six quarters to the second quarter of 2015 (the IA’s most recent quarterly numbers at the time this article was produced) and Targeted Absolute Return in two of the quarters.