Investing in retirement

Investing in retirement

In the past investing when approaching retirement was all about reducing risk and converting investments into cash ahead of buying an annuity. That is still the case if you do intend to buy an annuity. But if you are going to keep your pension fund invested, and take an income via drawdown or lump sums, then you need to think longer term. Your pension pot may need to provide you with an income for 30+ years and to do this it should ideally generate income and preserve your capital.

How you invest will depend on how you plan to use your pension fund – will it be the main source of regular income, used to provide for one-off expenses, left to provide for your family when you die or a mixture of all of these? When choosing investments you also need to consider the level of risk you are willing to take and how a downward turn in the market would impact your retirement income. The same principles of investing as usual apply and a well-diversified portfolio with a range of assets, geographical areas and sectors will help you weather most storms.

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Generating cash to pay your pension income

If you need to withdraw money from the fund, either regularly or ad hoc then you will need to generate cash within your fund to make your pension payments. This could be from income generating shares or funds or by selling investments. If you are dependent on this income then it might be a good idea to keep some of your portfolio in cash so that you are not forced to sell investments when markets are low – although investing in cash will give a poor return, especially in times of higher inflation. Cash could be generated by income paying investments such as corporate bonds or equity income funds. You may consider investing in the income units of funds, for example, rather than the accumulation units.

Dan Coatsworth, the editor of Shares Magazine, suggests six funds to generate income in retirement:

Fund Description KIID
Invesco Perpetual High Income Mark Barnett took over management of the fund following Neil Woodford’s departure in 2014. He has a similar investment approach to his predecessor, combining a high-level macro overview with bottom-up stock-picking. Unlike Woodford, Barnett prefers to limit the percentage of assets he has in his top ten stock picks and prefers to hold fewer unquoted companies in his funds.
Fidelity MoneyBuilder Dividend The fund, managed by Michael Clark, targets long-term income growth. Clark focuses on the sustainability of income across different stages of the market cycle, investing in companies whose dividend he believes can be maintained in difficult economic circumstances and grown over time. That means investing in companies with strong cashflows and robust dividend cover.
Aviva Multi Strategy Target Income Fund The fund, managed by Nicholas Samouilhan and Peter Fitzgerald, aims to deliver an annual income yield of 4% above the Bank of England Base Rate before tax payable by the fund regardless of the prevailing market environment. In addition the Fund aims to preserve capital, and to manage volatility to a target of less than half that of global equities over rolling three year periods.
Artemis Global Income The fund was launched in July 2010 and has been managed since then by Jacob de Tusch-Lec, who joined Artemis in 2005 to manage Artemis Capital. It targets rising income and capital growth, and focuses on investing in companies with a free cash flow yield in excess of 6%.
Newton Asian Income The objective of the fund is to achieve income together with long-term capital growth, mainly through investments in securities in the Asia Pacific ex. Japan (including Australia and New Zealand) region. The fund was launched by Jason Pidcock in 2005 but, following his departure, is now run by Rob Marshall-Lee and Zoe Kahn. The duo target high quality cash-generative companies with prospective yields greater than the index at purchase.
M&G Optimal Income The fund aims to deliver income and capital growth by investing in a broad range of fixed income securities, wherever manager Richard Woolnough sees the greatest opportunities. The investment process combines the Woolnough’s macroeconomic views with bottom-up credit recommendations from M&G's 30-plus credit analysts.

Remember that this is only guidance to help you - you should research each investment and consider whether it suits you before investing.

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