Annuities are so last year – now it’s time to sit back, take a Sipp... and work those funds
ONCE the flexible pensions world starts next month £9billion of annual pension money will no longer be used to buy annuities – plans providing a guaranteed income for life.
Instead, many people will prefer to keep their pension invested, drawing down income to suit their needs. They will do this through a self-invested personal pension – a plan through which a mix of shares, funds and investment trusts can be held.
SALLY HAMILTON looks at the fund options available to Sipp investors in search of a source of regular retirement income.
EQUITY INCOME FUNDS
UK EQUITY income funds are primarily designed to deliver a stream of decent and rising dividend income – so investor income can stay ahead of inflation. Patrick Connolly, of financial adviser Chase de Vere, says: ‘Around 80 per cent of all dividend income from the UK stock market comes from just 15 companies. UK equity income funds are good core holdings but Sipp investors should also consider funds investing outside the UK for dividend income.’
Dividend-friendly funds that Connolly likes include Threadneedle UK Equity Income (3.8 per cent yield) and Artemis Global Income (3.3 per cent).
MULTI-ASSET INCOME FUNDS
THESE funds spread the net across different assets – from shares and bonds to commodities and property – in search of income. Such diversification can help reduce the volatility that can hit funds heavily invested in shares, such as UK equity income funds.
Managers of multi-asset income funds include M&G, Old Mutual and Schroders. Old Mutual, for example, has a four-strong fund range called Generation Target 3:4, 3:6, 4:4 and 4:6.
The first number is the fund’s annual investment return target above inflation over rolling five or seven-year periods. The second is the annual income target in percentage terms.
John Ventre, manager of the funds, says: ‘There is logic in thinking of them as a bridge to eventual annuitisation. Annuities can be a good solution but perhaps when someone is older and can get better rates.’
M&G’s Episode Income is invested across bonds, cash, equities and property to generate its current 3 per cent income, which can be taken monthly. Schroder’s Global Multi-Asset Income fund aims for 5 per cent income.
Connolly likes JPM Multi-Asset Income, yielding 3.6 per cent, which is spread across 1,600 holdings. He also favours Schroder Multi-Manager Diversity Income, paying annual income of 2.9 per cent.
Jason Hollands, of Tilney Bestinvest, likes Premier Multi-Asset Monthly Income with a 4.7 per cent yield. A quarter of its holdings are in UK equities, a third in bonds, 22 per cent in property and some more unusual investments such as a firm that invests in peer-to-peer lending platforms.
MANAGED OR BALANCED FUNDS
LAITH Khalaf, of broker Hargreaves Lansdown, says multi-asset income funds also come in other guises – ‘managed’ and ‘balanced’ funds.
Among his preferred funds are Henderson Cautious Managed which invests in a mix of undervalued UK stocks with high dividend yields, bonds and cash. It yields 3 per cent.
He also likes Ecclesiastical Higher Income, which invests mostly in equi- ties with some fixed interest to reduce volatility. It pays a 4.1 per cent yield.
TARGET DATE FUNDS
TARGET date funds are multi-asset but the asset allocation changes as the saver gets older. The target date is the year an investor starts drawing income.
Providers of these funds include Fidelity and AllianceBernstein which manages the Architas BirthStar Tar-