Four ways to hit your income target in retirement
In a falling market, look to investments that produce a return naturally, says Ed Monk
Those living with the help of investments in retirement have different priorities to those looking for growth in the medium and long term. Retirees who are “decumulating” retirement savings – which means spending them rather than adding to them – do not benefit from market falls by being able to buy more assets more cheaply.
As explained in our front-page article, falling markets are a greater problem for those drawing money down from their pension. An important protection comes from assets that naturally produce an income, such as dividends from companies, rents from property or interest from bonds. The value of an initial investment will rise and fall as the value of those assets rises and falls but so long as investors don’t need to sell, they do not have to realise any losses. They can rely on the natural income the assets generate. Here are four investments that offer retirees a chance of meeting their income needs.
Equity income investment trusts
Investment trusts are similar to more traditional funds but they are structured as companies, and investors buy shares in them rather than units in a fund. Their structure enables them to borrow money and hold back dividend payments from one year to the next, offering smoother income returns than ordinary funds. This flexibility means well-managed trusts can pay dividends that rise every year, and the best have records of doing this running to many decades.
Equity income trusts target higher-than-normal income. Well regarded examples include City of London, which is offering a yield of 4.1pc, and Murray Income, paying 4.6pc.
Commercial property
Investing in properties used for all kinds of business is a way to tap into the more stable rents available from commercial tenants.
News from the sector recently has been negative. After the Brexit vote, funds that offer a portfolio of commercial property assets to ordinary investors had to lock in savers’ money because meeting redemptions would have meant the disorderly sale of properties.
Investing in the sector through investment trusts avoids this problem – a trust’s share price will fall if investors choose to exit in large numbers, avoiding the need to sell properties. F&C Commercial Property and Schroder Real Estate are both recommended by advisers, and both offer a yield of 4.9pc.
Peer-to-peer
Peer-to-peer lending involves matching individuals wanting a return with individuals or businesses looking to borrow. The idea is each party gets a better rate. This is done through an online platform. Rate Setter is one of the most established platforms, and rates range from 3.5pc for the shortest term loans to 5.9pc for the longest.
Retail bonds
These are issued by firms as a means to borrow money. If you buy them you receive interest every year until the bond matures, and then get your money back. The risk you are taking is that the company goes bust.
Bonds from household name companies are available such as Legal & General, paying 5.7pc, and Tesco, paying 5.1pc.