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.

You need to think longer term if you are going to keep your pension fund invested and take an income via drawdown or lump sums. 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.

Generating cash to pay your pension income

When you reach retirement age, 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. The former indicates that dividends or interest will be paid to you in cash. In contrast, an accumulation version of a fund is designed to offer you growth in the fund rather than income, so any income generated will be reinvested within the fund.

Giving you a helping hand

AJ Bell Youinvest has produced a list of its favourite funds if you are looking for inspiration for your ISA, Sipp or Dealing Account. It includes various active and passive funds which were assessed on a number of criteria including fund manager experience, investment philosophy, performance and cost. You can filter the list based on a range of factors including income and geographical coverage.

Dan Coatsworth, the editor of Shares Magazine, now suggests six income funds from AJ Bell’s favourite funds list which he thinks could be suitable for generating an income in retirement:

Fund Description KIID

Fidelity Enhanced Income

The fund, managed by Michael Clark, aims to provide a slightly higher yield than a traditional UK equity income fund by using derivatives, currently in the region of 6.8%. It sells options on a number of stocks in the portfolio to a third party, thereby boosting the fund’s payout. The option buyer has the right to any increase in a share’s price beyond a set level. As such, the bulk of investor returns are likely to come from dividend income rather than capital gains.

KIID

iShares Global High Yield Corporate Bond ETF

This is a low-cost passive fund which tracks an index of high yield bonds issued by companies around the world. It has a 4.7% historic yield with dividends paid twice a year. The total expense ratio is 0.5% a year, representing various fees and expenses for running the fund which are shared by investors. The index includes bonds from the likes of telecoms firm Sprint and computer data storage firm Western Digital at the time of writing.

KIID

River & Mercantile UK Equity Income

The fund, managed by Dan Hanbury, aims to generate a rising level of income combined with the potential for capital growth. It is currently yielding 3.9% with a portfolio that includes stakes in UK equities such as miner Rio Tinto and drugs giant GlaxoSmithKline. The bulk of the portfolio is made up of positions in quality businesses which tend to have high returns on capital, steadily growing cash flows and robust business models with high barriers to entry.

KIID

Newton Global Income Inc

Investors seeking diversification may find Newton’s fund interesting given that it invests in companies listed or located throughout the world. The asset manager takes a thematic approach to investing which focuses on structural changes impacting the global economy such as demographic shifts and the growing demand for healthcare. It tends to hold between 50 and 80 stocks and presently yields in the region of 3.1%.

KIID

Jupiter Asian Income

Fund manager Jason Pidcock has more than 20 years’ experience in finding good investments across Asia. At Jupitar Asian Income, he is seeking out high quality companies which can increase their dividends as their businesses grow over time. The fund invests primarily in companies listed or located in Asia Pacific including Australia and New Zealand, but excluding Japan. Current holdings include Korea-based Samsung Electronics and Chinese internet giant Tencent. The fund yields in the region of 3.5%.

KIID

First State Global Listed Infrastructure Acc

Although the fund only yields in the region of 2.2%, investors looking for income opportunities in retirement may wish to take a closer look at infrastructure for several reasons. Firstly, many infrastructure assets are able to raise prices in line with inflation. Secondly, infrastructure can be less volatile in performance than the stock market. The First State fund invests in a diversified portfolio of listed infrastructure assets around the world and pays dividends twice a year.

KIID

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

Need some investment ideas?

Have a look at our AJ Bell Favourite funds list or leave it to the experts
with the AJ Bell Passive funds.

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