Could they get this article?
This article is from the Association of Investment Companies. It would interest me to know whether education of this type has any influence on those , outside the readership of the AIC’s website. Good as the article is, it is talking, I suspect, to a group of people who are so sophisticated that they are outliers. The importance of articles such as this is to reinforce the statement of Bill Sharpe that turning pots to pensions is the “nastiest, hardest problem in finance!”
More than nine in ten people now take a leap in the dark when they retire. Data from the Financial Conduct Authority shows that despite an increase in annuity rates in recent times, 91% of people reaching retirement are opting to cash in their pension savings via income drawdown arrangements, rather than buying an annuity offering guaranteed lifetime income.
There are some good reasons for that. Above all, drawdown plans, where you take retirement income directly from your pension savings, leave room for those savings to continue growing, depending on investment returns. That will be to your benefit later in retirement – and potentially to the benefit of your heirs.
Still, drawdown comes with a major disadvantage too. You will need to invest your pension fund in such a way that it generates the income you need to live off, while also ensuring the money doesn’t run out. It’s a delicate balance of risk and reward that annuity purchasers don’t have to worry about.
How, then, to manage this leap in the dark? The short answer is that drawdown savers need to make sure their pension funds consist of a broad spread of assets and that there are plenty of sources of reliable income. Diversification provides you with protection – if the stock market plunges, holdings in other asset classes may offer comfort. Reliability of income, meanwhile, ensures you won’t unexpectedly find yourself short of cash in retirement.
David Prosser (author)
First, on reliability of income, investment trusts are entitled to hold back some portfolio income in strong years, so that they can fund dividends to shareholders in leaner times.
This ability to smooth out income underpins the track record of the AIC’s dividend heroes funds that have increased their dividends each year for 20 or years or more. The ten heroes with the longest streak of hikes can all point to a record going back more than 50 years.
You won’t necessarily get the highest yield when allocating your pension fund to these investment trusts. But you will get something that’s arguably more precious in retirement – a stream of income you can be confident in, at least based on the funds’ track record.
That leaves you to worry about the other drawdown challenge – diversification for value preservation and growth. And here too, the investment trust sector has a good case to make. There is plenty of choice when it comes to stock market-focused funds, but the investment trust structure is also well suited to investing in illiquid asset classes such as infrastructure, real estate and private equity. By adding funds with exposure to those asset classes to your pension fund portfolio, you can secure really good diversification.
Moreover, that doesn’t have to mean sacrificing income. The top ten dividend heroes include investment trusts from five different sectors of the industry – go a bit further down the list and you’ll find an even broader range of potential holdings.
Drawdown isn’t for everyone. If you want absolute security, an annuity is a better option – and recent rises in rates mean these contracts, widely available from insurers, offer better value than in the past.
However, if you’re hoping to continue increasing the value of your pension fund savings following your retirement – even if you end up buying an annuity later on – it’s vital to manage your drawdown investments in a way that maximises growth potential while minimising risk. A well diversified portfolio of income-generating investment trusts could be one way to tread that fine line.
