Since the pension freedoms were introduced nearly two years ago, savers and investors are constantly being encouraged to build a pension pot that provides enough income to fund their retirement.
The problem is finding a steady source of income in a low-interest, low-yielding environment.
Several factors are conspiring against those seeking an income at the moment, one of which is the rising threat of inflation – an inflationary environment tends to eat away at any income.
“Inflation has been consistently rising over the last three months, which will squeeze the living standards of retired people living on a fixed income, particularly as they often spend a disproportionate amount of their income on fuel, food and heating”, notes Vince Smith-Hughes, retirement expert at Prudential.
The outlook for fixed income is also proving problematic, as those who previously relied on the asset class to meet their income requirements can no longer do so.
A report published in February by MetLife, called Guaranteeing Real Pension Freedom, highlights nearly six out of 10, or 57 per cent, of over-40s worry that low long-term interest rates are making retirement saving more difficult, while 52 per cent voiced concerns about not having income certainty in retirement.
The Iress Retirement Income Report sets the scene: “Low interest rates will remain a factor, with the latest Bank of England Bank Rate cut to 0.25 per cent in August 2016, possibly not the last in this current run of monetary policy.
"Gilt yields also face an uncertain period as the negotiations for Britain to leave the European Union begin in earnest in 2017.
“The prolonged spell of low interest rates has had a profound impact. Choices made by savers, investors and advisers have been shaped by the search for yield, particularly for those already in retirement.
"Add in the volatility that stockmarkets inevitably endure from time to time, and you have a challenging environment in which to meet and manage individual retirement expectations.”
Diversifying dividend growth
Global equity income may provide part of the solution. Adrian Lowcock, investment director at Architas, explains: “One of the key issues in retirement is inflation proofing your income – getting an income which can grow as prices rise.
“Fixed income does not offer this, nor does cash. Equity income can offer capital growth and rising dividends.”
He notes: “Global equity income is important because diversified income helps protect retired investors from specific company risks as well as specific country risks. The more diversified the portfolio, the better as it reduces the possibility of investment shocks hitting the market.”
With more regions, such as Asia, encouraging corporates and large companies to pay dividends as part of wider corporate governance improvements, the reliability of this income stream makes it well suited to a retirement income portfolio.
The key is investing for growth, as this will ensure those preparing for retirement will have access to a pipeline of income, even while long-term structural growth is likely to remain low, Andrew Wheatley-Hubbard, manager of the BlackRock Global Equity Income fund, suggests.