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Investing in retirement: fund ideas for income drawdown

Joanna Faith
Written By:
Joanna Faith

If you choose income drawdown to fund your retirement, where you invest your money could determine your standard of living. We ask the experts for tips and fund recommendations.

The pension freedoms introduced last April gave people unprecedented access to their savings pots and boosted the popularity of income drawdown.

Income drawdown is when the money in your pension pot is invested and you take an income when you need it. The income you receive will depend on how well – or not – the funds in your portfolio perform.

The biggest concern and challenge for most retirees is generating a reliable income that can grow.

If you choose the income drawdown route to fund your retirement, it’s worth considering a couple of key points before doing anything with your pension pot.

Firstly, think about how long you could live.

Darius McDermott, managing director of Chelsea Financial Services, says people tend to have a “morbid tendency” to underestimate their life expectancy.

“We could all live for 30 years in retirement and we don’t want just the first 10 to be good and the last 20 on the breadline. So don’t take too much income out and make sure your pot is still growing,” he says.

Secondly, consider how much certainty you’ll need when it comes to your regular income. Are you happy with a variable income or not?

McDermott says: “It’s very hard to go from a monthly salary to a varying amount of income, so many will choose to have an annuity (an insurance policy guaranteeing an income for life) to cover the essentials like day-to-day bills and income drawdown or income from other investments for the nicer things in life.”

He also suggests having a cash buffer of at least one year, preferably two.

“As we’ve been reminded in recent weeks, stock markets can be volatile and can take a pounding, so you need to be able to ride out these periods.”

Fund picks

A good way of mitigating volatility in markets and preserving capital is to invest in a balanced fund. These products attempt to smooth returns by combining a range of defensive and growth-focused assets.

Tom Stevenson, investment director at Fidelity International, recommends the Jupiter Distribution fund, which is explicitly designed for cautious investors seeking a monthly income, but are also “keen to avoid losing their capital”. It typically holds around 60% of its assets in bonds and 30% in equities with the remainder in cash and yields 2.7%.

Stevenson says: “The fund would be a sensible choice for people approaching or in retirement.”

McDermott also recommends Jupiter Distribution as well as the Henderson Cautious Managed fund, which also invests in a mix of equities, bonds and cash and yields 3%. The latter is considered the less cautious of the two.

“Both have a big focus on reducing risk in the portfolio and trying to preserve capital,” he says.

Equity income

Tim Cockerill, investment director at financial advice firm Rowan Dartington, says equity income funds are a good option for your retirement money as the source of income is very diverse. This is down to the sheer number and variety of companies held in the portfolio, which means the risk of the dividend (pay-outs made to shareholders by companies) being cut is considerably reduced, although still possible.

He says opting for an investment trust structure will offer you an extra layer of protection as these funds can use ‘reserves’. This is income that is set aside for later distribution, usually at times when there are dividend cuts.

Reserves are unique to investment trusts. Trusts have boards and the board members decide how much of the income they receive they want to distribute and how much they want to add to reserves. Open-ended funds have to distribute all of their income.

Cockerill likes the Perpetual Income & Growth trust which yields 3.2%, has reserves of around 1x and “a long track record of delivering solid returns”.

He also likes Bankers trust, which is yielding 2.8%. “This is not too high an income but the dividend has not been cut in 49 years and is 2x covered,” he says.

Income from various sources

If your focus is making sure your income comes from a range of sources, not just equities and bonds, then Adrian Lowcock, head of investing at AXA Wealth, recommends buying real assets.

He likes the Architas Diversified Real Assets fund, which invests in long term assets such as airplane leases and GP surgeries. It yields 3.9%

“These investments provide long term inflation proofed income while protecting investors’ capital. This diversification helps to reduce risk when combined with a traditional bond and equity portfolio,” says Lowcock.

In a similar vein, Cockerill tips infrastructure investment trusts, which offer yields of between 4% and 7%.

“The underlying projects have contracts which secure their income stream for many years,” he says.

One example he likes is International Public Partnerships, which is yielding 4.6% and which invests in public and social infrastructure assets in the UK, Europe, Australia, North America.