Dividends are vanishing, but you can protect your pension

PENSIONERS who rely on dividend payments from investments face a hefty loss of income this year as companies slash and delay payments.

Following the closure of millions of businesses due to the coronavirus, many firms are looking to do all they can to hang on to cash reserves to help them through the difficult time ahead.

And cutting dividends, the portion of the company’s profit given to shareholders who back the business, is a simple way to do this.

But it means investors who have diligently saved for retirement and rely on shares that pay regular dividends, now face a shortfall in their annual income. The same goes for those who save in ‘income funds’, which invest in companies that have strong prospects for steadily growing dividends.

John Monaghan, of investment group Square Mile, says: ‘ The longer businesses are impacted by the crisis, the larger the potential implications on dividend distributions. The fall in income will filter down to funds investing in certain companies and will reduce the amount of income received by investors.’

With interest rates on cash savings at record lows, many savers have transferred their nesteggs into shares as a way to boost their income.

But so far this year, UK companies have already made around £4.8 billion of dividend cuts.

And it is estimated that another £180 million of dividend payments is under consideration, according to figures from broker AJ Bell.

Most cuts have been announced in the past two weeks by household names such as M&S, the builders Persimmon and ITV. Property firm Belvoir Group was one of the latest to scrap its dividend on Monday.

Pressure is also mounting on some of the largest banks listed on the London Stock Exchange not to pay out around £7.5 billion worth of dividends due over the next two months.

But experts say that it might not all be doom and gloom.

Darius McDermott of FundCalibre says: ‘Even if dividends are cut, it could be temporary — certainly not as long as in the global financial crisis, and not all will be cut. Those companies with stronger balance sheets may well continue to pay.’ He insists income funds are still a good bet. These provide an income, known as a yield, and your money can also grow as share prices increase. Mr McDermott likes M& G Global Dividend, which pays a quarterly income, and holds software giant Microsoft and tobacco firm Imperial Brands in its top ten biggest investments. He says: ‘ Global funds have a larger opportunity at the moment because they have more companies to choose from.’ The fund has turned £10,000 into £12,218 in five years. Its current income is 2.2 pc, or a £220 payout over a year on £10,000.

Mr Monaghan suggests Troy Trojan Income, which pays out twice a year.

He says: ‘It invests in companies that have a long history of paying reliable dividends, such as Unilever and Royal Dutch Shell, aiming to provide protection during more volatile market conditions.’

The fund has turned £10,000 into £10,684 in five years. Its current income is 3.9 pc, or £390 over a year on £10,000 invested.

Mr McDermott also tips Royal London UK Equity Income, which pays a quarterly income.

The fund has lost money over five years, however, with a £10,000 investment now worth £9,422. But its current income is 4.5 pc, which means a yearly payment of £450 if you made a £10,000 investment.

Those who have savings in an investment trust might have some protection from income losses. A unique feature of these types of funds is that the manager is allowed to dip into a built-in cash reserve to maintain dividend payouts. Alliance Trust and Scottish Investment Trust, for example, have more than two years’ of dividend payments stored away, according to AJ Bell.

Just as it is important to make sure you hold a wide range of investments across a variety of markets and asset classes, it is also important that your income comes from different sources.

Adrian Lowcock, head of personal investing at Willis Owen, says: ‘This means having income from equities (shares) to bonds and infrastructure to real assets.’

For those worried about plugging any shortfall in income, now could be the time to dip into any cash savings. Mr Lowcock also suggests considering an annuity — an insurance policy that pays an income for life.

He says: ‘ Annuities offer something that stock markets cannot: a stable income, come rain or shine. The interest rates on annuities are not attractive and given the recent cut in the Bank of England base rate, they are unlikely to get better any time soon. But it may be worth considering if you are a smoker or an older retiree.’

If you have deferred your state pension, now may be the time to start collecting it.

Those who have deferred for a year or less can apply online at

www.gov.uk/get- state-pension. If you have deferred for more than a year, you need to call the Pension Service to claim (0800 731 7898).

You can also boost your dividend income by making sure you hold funds and shares in an Isa, as there is no tax to pay on dividends. Outside an Isa, savers can receive up to £2,000 each year tax-free from dividends. Husbands and wives can save tax by splitting share ownership to utilise each of their allowances.