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 pension 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 (they can go down just as easily as up!) 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 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) 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.
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 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. Many investment Trusts can provide an income stream via Dividends as well as offering the opportunity for Capital Growth through a rising share price.
All of the above investments have RISK, which means their value is not guaranteed and you may not get back the amount you invested. You should not consider an investment term of less than 5 years.
National Savings and Investments
Completely risk free and a guaranteed return that is usually a little more than inflation 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 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.