Innovative retirement income products launched
Both L&G's Retirement Income Multi-Asset fund and Aegon's High Income fund are invested across a range of asset classes and regions, and are designed to suit investors in the years approaching and during retirement.
April 2015's pension shake-up, announced in last March's Budget, will create new opportunities for people to leave their pension fund invested while taking a retirement income from it - effectively an unrestricted form of the current income drawdown option.
Aegon argues that in this increasingly flexible and 'phased' retirement landscape, people are keen to take control of their own pension destiny, rather than committing it all to a rigid, restrictive annuity.
Moreover, they are likely to start income from their pension pots before they stop working and earning entirely.
And they may well also have to cater for a retirement that could last 30 years or more, so they need to consider capital security and growth as well as income stream.
These trends are shaping the new investment products coming to the market and targeting the pre-retirement and retirement market.
Aegon's High Income fund is managed by its sister company Kames Capital and will be badged on external fund platforms as the Kames Diversified Income fund.
It invests in a mix of bonds, UK and global equity and property, but unusually, up to 30% is in high-yielding alternative assets with low correlation to bonds and equities, such as aircraft leasing and Asian property.
The aim, says Aegon's investment director Nick Dixon, is "to generate a gently rising and dependable income, even if the capital value may fluctuate over time".
The fund was producing a running yield of 5.3% as at the end of July, but the long-term target is a 5% yield plus 2-3% capital growth after charges, to give a total return of around 7-8% that will enable it to keep pace with inflation over the decades of retirement.
"We are seeing opportunities across a range of asset classes," says Vincent McEntegart, fund manager at Kames Capital. "For example, in terms of equities the fund has a bias towards financials as many insurers and some banks are currently paying attractive dividends and declaring healthy increases in their dividends.
"We are also invested in listed real estate funds mainly in the US, Europe and Asia, which are providing income from rents on commercial property. Closer to home we have invested in UK-based supersize warehouses which act as distribution hubs for large retailers."
The L&G product is a conventional unit-linked pension fund, and fund manager Martin Dietz explains that it will be on offer through employer pension schemes and the platforms they use.
"We're aiming to provide this as a simple, risk-managed, drawdown solution for those with smaller pension pots of perhaps £20,000 plus, who don't have the money to take advice or go into a Sipp," he says.
"It's our response to the growth in demand for income drawdown: it combines a low-risk, diversified multi-asset approach plus the kind of cash-flow focus you'd see in the running of an annuity."
The fund is invested in the firm's in-house index tracker funds alongside some of its actively managed funds, thereby keeping costs down.
It targets a return of base rate plus 3.5% (after an annual management charge of 0.35%) over a five to seven-year market cycle, with less than half the volatility of developed economies' equity markets.
"People in retirement want a stable outflow and sustainable income above all; we focus on short-term cash flow management to provide the income they require," adds Dietz.
However, because over the longer term cash flows are less certain, and people are likely to want more than the natural income generated by the fund at some points in their retirement, they will also be free to take whatever income they need, potentially running down the capital over time.
It's likely that both the retail fund platforms used by Sipp investors and the pension fund platforms available via occupational schemes will see more innovation along these lines in the coming months.
This article was written for our sister website Money Observer
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.