A regular income stream is the primary need for more and more investors, perhaps to supplement a pension or help with day to day living expenses. In this historically low interest rate environment, the hunt for decent levels of income has become even more pressing, not helped by inflation eating away at the small returns provided by traditional income generating investments such as cash and gilts.
The harsh reality is that if an investor’s money is tucked away in a typical bank or building society account, it is highly likely that its value is shrinking in real terms. Back in March 2009, interest rates sank to a record low of 0.5% and have stayed at this level ever since. Savers have been hit particularly hard, with banks and building societies cutting rates in line with the Bank of England’s base rate. In July 2007, the Bank of England base rate was 5.75%. A lump sum of £10,000 invested into a standard deposit account, would have generated gross interest of £575. Fast forward five years, and this return has plummeted to just £50 a year, based on current base rates. Not good news for anyone reliant on maintaining a certain level of income.
Looking beyond cash, investors have traditionally turned to fixed income assets, such as bonds and gilts. However, the ‘less risky’ fixed income asset is no longer ‘less risky’. The problem here lies in the ‘fixed’ part. With yields at low levels, an investor needs to decide if they would be willing to accept a long-term pay freeze as this is exactly what they would be doing if invested in such assets to fund retirement for example.
What are the alternatives to the traditional income options?
So, where should investors be looking to get the income they need? For investors who want to look beyond the traditional income avenues of gilts and bonds, then equities and multi-asset funds are a strong contender. Premier Asset Management offers a range of different funds with an income objective. Whilst there is often the assumption that equity investments are for the more adventurous investor, we would argue that this is not necessarily the case. If an investor’s main priority is to receive a regular income from their investment, this objective does not have to be hindered by any fluctuations in the markets which may not adversely impact the level of income paid out. Our funds have a long-term history of achieving attractive levels of income.
There is the common misconception that the level of income received from an investment will automatically go up or down depending on movements in the stockmarkets and the value of the investment. Not so; capital and income are two separate elements of the investment, so whilst the value of the investment may go up and down, the income paid out from dividends is typically based on the number of shares owned and not a percentage of the investment’s value.
How do you fund a retirement that could span decades rather than years?
We are currently seeing a massive demographic shift taking place, which could result in almost three quarters of the world’s retail assets being held by retirees, or those close to retirement, within five years. Life expectancy in the UK also continues to increase. The number of people living in the UK who are aged 100 years and over has risen by 73% over the ten years to 2012, according to statistics from the Office for National Statistics, with life expectancy in Britain reaching its highest level this year for both sexes. With a retirement that now has the potential to span decades, rather than years, it is therefore unsurprising that income generation is at the top of many investors’ list of priorities.
So, whilst it is good news that we are all living longer, this means that we should all be giving much greater consideration to how we expect to fund those extra years of retirement. Anyone aiming to retire at the age of 65 for example, will need to feel comfortable that there is enough in the pension pot to meet expenditure requirements that could span 25 years or more.
Investing the pension pot
Over the past few months there has been much attention given to the impact of the Chancellor’s proposals to make major changes to the UK’s annuity rules. From April 2015, it is intended that retirees will have significant flexibility as to how they access and use their pension pot, with buying an annuity no longer the default option. Whilst the annuity route may still be a popular choice, we believe more investors are likely to invest in funds which can provide the regular income stream they require, and perhaps the potential for longer term capital gains. Many investors not choosing an annuity are likely to want a variety of sources of income to diversify risk. Multi-asset funds that are designed to deliver regular income, may be a good choice for some investors seeking this type of diversification, as the income is typically paid from a wide variety of different underlying investments.
Whatever your clients’ income needs, Premier has a range of different investment solutions available, covering a broad range of risk profiles and objectives, designed to meet the different needs of investors. In particular, the Premier multi-asset income funds both have a Synaptic Risk Rating 3, with the award winning Premier Multi-Asset Monthly Income Fund currently the largest holding within the Premier Income Portfolio and Premier High Income Portfolio, also Synaptic Risk Rated 3.
For more information about these funds, and any of the other funds and portfolios currently risk-rated by Synaptic, details of your primary contacts at Premier Asset Management are listed below, or visit the Premier Asset Management website; www.premierfunds.co.uk
Premier manages a range of investment solutions risk rated by Synaptic to help meet different investor goals, including income, capital growth, conservative growth and absolute returns for different investor risk profiles. Our investment strategies powering the solutions include multi-asset, UK equities, global equities and fixed interest. The Premier Private Client Portfolio Management Service offers a choice of 10 risk graded growth model portfolios and 3 income model portfolios designed to meet the varied needs and risk profiles of your clients. Premier currently manages £2.7billion of assets.
* Note: The historic yield reflects distributions declared over the past twelve months as a percentage of the mid-market unit price of the fund, as at 01.05.2014. The yield is not guaranteed and will fluctuate.
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