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Balancing act

For many investors at, or near retirement, the words risk and income do not sit comfortably together. But with current low interest and annuity rates, many are looking for ways to improve their income.

The recent increase in the number of investment products designed to provide income is the inevitable industry reaction to this consumer demand for ways of meeting their income needs.

But at the same time, the current stockmarket volatility and global unrest has heightened concern over investing directly in equities.

Providers, however, remain keen to encourage investors to consider different forms of investment that may provide higher levels of income than can be gained from deposit accounts, albeit with some risk attached to them.

It falls to IFAs to recommend appropriate products that will meet their clients&#39 needs in accordance with their circumstances and their attitude to risk.

As part of wider research into market segmentation, Axa Sun Life identified three major customer groups that require income-producing products. They can be characterised as follows:

The retirement planner

Typically aged between 50 and 55, their mortgage will be paid off, they will have grown-up children and could be empty-nesters.

Their thoughts are turning to retirement and are starting to consider different investment options. They want to maximise any tax advantages and are prepared to take a controlled degree of risk to achieve their objectives. In short, the retirement planner is planning and investing now for income in the future, that is, deferred income.

The almost retired

Aged between 55 and 60, they could be partially retired or working in less well-paid emp-loyment than previously and are looking forward to full retirement.

They are interested in topping up their current income until they start to receive their occupational and/or state pension. They are interested in assessing different income options, maximising any rem-aining tax advantages and taking a limited degree of risk to achieve their objectives. They are looking for income now to secure their future.

The retired

Their retirement income probably is not what they were hoping for. Current interest rate falls have cast a shadow over some of their plans and they basically want more income than can be provided by dep-osit accounts.

They want to increase their income, maximise any remaining tax advantages and may be prepared to take a small degree of risk to achieve these objectives. In summary, the retired are seeking to top up their income to enjoy a comfortable retirement lifestyle.

These are the main customer groups looking to invest for income. Clearly, there are other circumstances that req-uire the use of income producing products, for example, school fees and long-term care. For the purposes of this article, I will concentrate on the broader groups identified by the research.

The box above highlights some of the solutions available for each of our target groups and the typical yield for each type of product.

In summary:

Low and growing income plus capital growth – Investors can expect a low initial level of income that grows as the underlying investment grows. This can be achieved by equities and equity income funds and should provide an initial yield of 2-3.5 per cent.

As much income as possible, capital guaranteed – For the risk-averse looking to maximise income from their investments. High-interest society accounts and guaranteed inc-ome bonds are an ideal solution and can expect to produce a yield of 3.5-5 per cent.

A balance of income and growth – For those looking for a reasonable level of income at outset and are prepared to take some risk to achieve rising income and the possibility of capital growth. Distribution funds and balanced funds would be ideal and would yield initially 4.5-6 per cent.

A good level of income as long as my capital is relatively secure – For those investors wishing for a good level of income but also wanting to ensure that their capital is relatively safe. With-profits bonds and investment grade corporate bond funds are good examples of this type of investment and can be expected to yield 4.5-6 per cent.

A high level of income acc-epting capital will be put at some risk – For those investors needing a high level of income now and are prepared to accept that this means putting the capital at risk. High-yield corporate bonds will yield 6-10 per cent.

Looking at customer needs and generic solutions, we can see that there is a clear trade-off between the level of income and growth requirements and the risk to the original capital. It is important that the customer is made aware not only of the income they can expect but also how and what risk they are taking with the underlying capital.

“Some income now as long as it grows as the years go by”

Generic solution: FTSE All-Share index stocks, UK equity income funds

Expected yield:

2-3.5 per cent

“As much income as I can get as long as my capital is guaranteed.” Generic solution: Building society deposit, guaranteed income bond

Expected yield:3.5 – 5 per cent

“A reasonable level of income, growing income and some capital growth, too.”

Generic solution:

Distribution fund,UK equity income and bond income fund

Expected yield:4.5 – 6 per cent

“A good level of income as long as my capital is relatively secure.”

Generic solution: UK corporate bond fund, With-profits bond Expected yield:4.5 – 6 per cent

“Much higher income, accepting that my capital is at risk.”

Generic solution:High-yield bond (with capital risk)

Expected yield:

6 – 10 per cent

All yields show the gross figure quoted (that is, before income tax is deducted)


J O Hambro Capital Management – JOHCM UK Recovery Fund

Friday, 19 October 2001.Type: Oeic.Aim: Growth by investing in UK equities.Minimum investment: £2,500.Place of registration: Dublin.Investment split: 100 per cent UK equities.Isa link: Yes.Charges: Initial 5 per cent, annual 1.25 per cent.Commission: Initial up to 3 per cent.Tel: 020 7747 5646. 

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