Search for the Holy Grail: an income in retirement

REACHING retirement means the time has come to scale back on work. But you will need to make sure your pension fund keeps working hard to provide you with the income you need to support a new lifestyle.

The pension freedoms will benefit many people, giving them greater control over their money. But it’s important to make the right decisions about how to use it — and there’s no one-size-fits-all solution.

Many retired people still have mortgages to pay while others are debt-free and just need enough to live on.

Thanks to the pension freedoms, there are a number of ways you can generate income from your retirement fund. Here are the steps which will help you secure that all-important income and, crucially, ensure your savings last:

DRAW YOUR MONEY AND GET INCOME

INCoME drawdown allows you to keep your money invested, so it can carry on growing, while taking a regular income.

The main attractions are that you decide where your money is invested and how much you wish to draw. This is flexible so you can change how much you take as your circumstances dictate.

It is important to structure investments carefully to avoid running out of cash. Traditionally older savers would be switching out of stocks and shares for less volatile bonds, ready to convert their fund into an annuity (see below).

But using drawdown you need to keep money invested in equities to maintain the capital you are now drawing on — and could be doing so for many years to come.

SPREAD THE RISK WITH A PORTFOLIO

A poRTfolIo containing a proportion of stock market investment funds is most likely to provide the combination of income and growth to maintain the capital you are now drawing on.

By investing in funds, money is pooled with that of other savers and invested by a fund manager who can choose established, cash-generative companies that they think will produce the income you need.

Spreading the risk across a number of companies is wiser than investing directly in individual stocks. popular funds for income drawdown, according to Hargreaves lansdown, are Artemis Income, Cf Woodford Equity Income, Hl Multi-manager Income & Growth, Invesco perpetual High Income and Newton Global High Income.

TRUSTS WITH A TRACK RECORD

INvESToRS often overlook lesser-known investments called investment trusts, which are another type of collective or pooled investment fund. Invest- ment trusts can create steady returns by squirrelling away up to 15 pc of their dividends each year.

This can help smooth income payouts by holding back some returns in the stock market’s good years in order to top-up income in bad years.

This means that some have very long records of raising dividend payments year in, year out. The City of london Investment Trust i s popular f or its i ncomeproducing track record. It grew its annual dividend for the 48th consecutive year in 2014. TAKE BONDS FOR REGULAR CASH BoNdS offer a fixed income from money you ‘lend’ to the Government or companies who need to raise cash. They come with the promise to give your money back at the end of a fixed period and provide an important diversification from just holding equities. A word of caution though — bonds are impacted by movements in interest rates, where their value may go down if interest rates rise and vice-versa.

Strategic bond funds are widely favoured among advisers, because managers have flexibility to adapt as the markets shift, such as the Artemis Strategic Bond or Kames Strategic Bond.

THE ANNUITY IS NOT DEAD

AN ANNuITy i s an i ncomegenerating contract sold by an insurance company and usually bought with retirement savings. It guarantees an income for life.

However, the level of income provided depends on the interest rate on bonds issued by the Government at the time you purchase the annuity.

Sales of annuities have plummeted s i nce t he pensions freedoms were announced, as people plan to use alternative methods to generate income.

yet an annuity may still be the right choice for at least part of your pension pot.

The key to finding the right annuity is to shop around. It sounds complicated, but it’s just like getting a quote for anything else — you can use a broker or phone around a few insurance companies yourself.

WHY PROPERTY IS PROFITABLE

pRopERTy offers an income through direct investment in a buy-to-let house or flat, but also through property funds.

In both cases, rents can be raised in line with inflation. Holding property provides diversity, as the property market behaves differently from the stock market.

Recommended property funds include M&G property portfolio, Henderson uK property and l&G uK property, which all i nvest i n bricks- and- mortar commercial property. TRY A LITTLE OF EVERYTHING THERE is no one- size-fits-all solution to generating income. The majority of investors are expected to mix and match their retirement income, combining annuities, drawdown and cash withdrawals. Some will include property in their portfolio, too.