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The most popular funds since pension freedoms

Joanna Faith
Written By:
Joanna Faith

As the fourth anniversary of the ‘Pension Freedoms’ approaches, investment platform AJ Bell shines the spotlight on the most popular funds for income drawdown.

Since April 2015, people aged 55 and over have been able to access their pension pots and spend and invest them as they wish. This coincided with the government axing compulsory annuities, which are secure incomes for life paid out by life insurance companies.

Instead, many retirees have opted to go into income drawdown. This means drawing an income from their pension fund, which remains invested through retirement. This gives the retiree flexibility and the potential to grow the value of their investments over time – depending on how the market performs and how much risk they take with their investments.

Since the so-called Pension Freedoms were introduced close to four years ago, there has been an uptick in the number of investors using income drawdown. Coinciding with this milestone, AJ Bell has analysed the most popular funds for income drawdown among its customers from 6 April 2015 to date.

Fundsmith Equity has been the best-selling fund as well as the top performer. Managed by well-known investor Terry Smith, this £17.5bn global equity fund takes a concentrated and high conviction approach. If £100,000 had been invested in April 2015, the investment would now be worth £165,100 in size – even factoring in £5,000 being withdrawn each year as income.

The second most popular fund has been Scottish Mortgage investment trust, a listed global equity fund, which targets growth-focused companies. If drawdown investors had allocated £100,000 to this fund in April 2015, the investment would now be worth £161,110 in size – factoring in a £5,000 annual withdrawal.

In comparison, £100,000 invested in City of London investment trust, the worst performer, would now be worth £96,170 – after withdrawing £5,000 a year as income.

“Even this is still a healthy-looking picture,” says Tom Selby, senior analyst at AJ Bell.

“There has been a surge in investors using income drawdown since the pension freedoms were introduced and the great balancing act they face is generating a decent income that will last throughout their retirement.

“The good news is that so far, pension freedom investors have benefited from strong stock market returns and even better active fund selection, in most cases generating a golden combination of income and capital preservation.”

However, investors should not be lulled into a false sense of security.

Separate AJ Bell research found 30% of investors have no idea what has happened to their fund since entering drawdown.

“Even star fund managers can suffer and the order of investment returns will have a significant impact on retirement outcomes,” says Selby.

“History has shown us that, at some point or another, stock markets are almost certain to blow up, and anyone who enters drawdown and takes big withdrawals at just the wrong time could severely damage their long-term prospects.

“In other words, don’t assume the experience of the last four years will be repeated in the next four years.”

Total returns + £5,000 per annum withdrawals

Most purchased funds by income drawdown investors since 6 April 2015 (in order of popularity) Total return – no withdrawals Total return – annual £5,000 withdrawal*
Fundsmith Equity £192,100 £165,100
Scottish Mortgage (IT) £190,700 £161,110
RIT Capital (IT) £137,250 £114,520
iShares Core FTSE100 (ETF) £120,580 £97,640
City of London (IT) £118,740 £96,170
Lindsell Train Global Equity £187,090 £158,040
Finsbury Growth & Income (IT) £145,970 £120,960
Vanguard Lifestrategy 60% £125,690 £104,130
Murray International (IT) £136,270 £112,220
Personal Assets (IT) £119,470 £99,210
£100,000 portfolio split equally across the 10 funds £147,386 £122,910
Source: top 10 most purchased funds by income drawdown investors via AJ Bell.  Investment performance data from FE analytics 6/4/2015 – 28/3/2019.  *5% of opening fund value, taken quarterly