Income Choices

Retirement Income Options

Assuming you have maximised your ISA allowances,  which has to be the first port of call for any investor, there are a whole array of different income producing investments that can be used to supplement your retirement income, If you have already looked at our ISAs and Bonds page below is a brief overview of the most common instruments used for income.

Equity Income Funds

Using shares and bonds held within a Unit Trust or OEIC, Equity Income funds seek out investments that provide a steady stream of income, most usually in the form of Dividends  from shares. Equity Income fund Managers tend to focus on the likes of Utility Companies that will not only provide them (and in turn you the investor) with a regular flow of income but also with the potential for some underlying capital growth.

These funds do have risk as there is the underlying volatility of the shares held within the fund but they can provide you with a regular income, usually in the region of around 4% per annum.  Although that may not seem overly impressive you do have the chance of your capital increasing in value as the value of the underlying shares rises (but that is not guaranteed).

Fixed Interest Investments

Whilst they are never going to provide the greatest in terms of return they are a comparatively safe haven during troubled times.

Fixed Interest Investments include UK Government Debt, (usually referred to as Gilts). These are a form of debt issued as Bonds which pay a fixed rate of interest twice a year and are completely safe as the Government is unlikely to go bust or default on the interest payments. Gilts, like corporate bonds, are bought and sold where their price fluctuates daily which will affect the yield (the real value of the payment to the holder) so you are not guaranteed to get all your capital back.

Corporate Bonds are debt issued by Companies and a  Corporate Bond Fund will seek to invest in high grade (ideally ‘Triple AAA’)  Sterling denominated  Bonds. The Bonds are essentially a loan to the bondholder which a Company makes for a number of years. In return for the loan the Company pays a fixed amount of interest over the life of the Bond. However, this income/interest is not guaranteed, and is only as good as the quality of the Company issuing the Bond.  The smaller and more high risk the company issuing the Bond the greater the level of interest you will receive to compensate you for the increased risk to your capital.

Open Ended Investment Companies (OEICs)

OEICs operate in a similar way to Unit Trust except that an OEIC is legally constituted as a limited company  and do not therefore have a trustee overseeing the investment process. Instead, however, they have a depository which holds the securities and has similar duties to a trustee.

Most OEICs only have one unit price and the initial charge is added as an extra. Unit Trusts always have two prices; the offer price that you buy at which is around 5% higher than the bid price which you sell at (the difference is known as the spread).

Rather than buying nits you are essentially buying shares in the OEIC Company which tend to run a series of sub funds for different classes of investor.

Investment Trusts

Investment Trusts operate as a Limited Company in which you buy shares, otherwise they have a lot  in common with Unit Trusts and OEICs in that they provide a method of pooling your money with other investors.

Investment Trusts shares are traded on the London Stock Exchange and their share price will be constantly changing as due to investor demand and changes in the value of the underlying assets. Investment Trusts are subject to the same types of risk associated with any product that invests money either directly or indirectly in the stock market but the level of risk depends on the trust’s strategy and the classes of assets held.

Most Investment Trusts borrow substantially to finance further investment (a process known as gearing). The use of gearing can lead to much increased volatility in the Net Asset Value (NAV) of the shares, as any modest movement will be magnified as a result of the gearing.

Investment Trust shares are said to trade at a Premium (where the value of the shares is greater than the value of the underlying assets or at a Discount, where the value of the shares is less than that of the underlying assets

National Savings and Investments

Completely risk free and a guaranteed return! What’s not to like?  Well the return!! Usually a little more than inflation (if you’re lucky) but Pensioners Bonds are genuinely good value and NS&I are a safe haven for a proportion of your funds although it can involve tying your money up for 5 years.

In some instances returns can be paid without deduction of tax (although taxable), which can be beneficial if you are a non-taxpayer.  Products include the National Savings Bank accounts and various forms of Savings and Income Bonds, all of which are underwritten  by H.M. Treasury, so 100% guaranteed.