Smart strategies a reader can adopt to protect their income amid dividend cuts and interest rate falls
I am in drawdown but am becoming increasingly concerned about the number of companies cutting dividends in recent months and the impact that will have on my income. In addition, I have money in a Cash Isa and a separate savings account on which I’ve been told interest rates are coming down. I rely on being able to generate a decent amount of income from my combined investments and savings. What can I do to help increase this level of income, and what do I need to bear in mind?
The bad news is that income is going to be quite scarce over the short-term, says Darius McDermott, managing director of Chelsea Financial Services: “It’s hoped that the dividend cuts will be temporary, but the longer the crisis goes on, the bigger the impact will be.”
Cash savings are likely to pay very little, if any, interest for the foreseeable future. “So it may be prudent to keep hold of some cash in case markets fall again,” he adds. “I certainly wouldn’t suggest you invest it all now when the outlook is still so uncertain.”
Of course, you can potentially increase your income by taking more risk – but this is not advisable, warns Philip Wise, retirement income planning director at Informed Choice.
“An investment portfolio that carries more risk of loss than you can tolerate is a recipe for sleepless nights and an unhappy retirement,” he insists.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, agrees. Rather than increasing your income, she suggests reducing how much you’re withdrawing. “Go through your budget and identify the compromises you’re prepared to live with in the short-term so that you can preserve as much of your savings as possible,” she says.
You should also reconsider plans to draw income from the fund as this could have a detrimental longer-term effect on the fund.
“Anyone in drawdown should have one to three years’ worth of expenses in savings for this eventuality, so it’s time to switch to drawing income from emergency savings,” she adds.
Depending on your age and health, Coles suggests considering using a slice of your pension to buy an annuity.
“Rates aren’t much to write home about, but assuming you’re a reasonable way into retirement, and qualify for an enhanced annuity, you could get a 5% return, which is better than cash,” she says.
It’s also worth shopping around for the best rates on Cash Isas and savings accounts, says Adrian Lowcock, head of personal investing at Willis Owen.
“You could consider a range of fixed-term or notice accounts for your cash savings as these tend to pay higher interest rates,” he says.
He also suggests building a portfolio of fixed-term accounts so that you always have one maturing soon, which means you can access the interest when needed.
Within your investment portfolio, relying on companies paying reasonable dividends is a potentially dangerous approach, says Scott Gallacher, director of Rowley Turton.
“It might be better to revise this investment strategy and consider a ‘total return’ strategy that comes from a combination of income and capital,” he says.
As alternatives to equities and cash, he highlights fixed-interest holdings, such as gilts and corporate bonds, alongside property exposure. “However, these assets aren’t immune from either falling income or capital losses,” he warns.
Alternative treatment plan
Philip Wise at Informed Choice believes it is highly unlikely you will be able to live comfortably on investment income alone.
“It’s best to diversify your portfolio across the mainstream asset classes (shares, fixed interest stock, property and cash) and to finance outgoings from a combination of income and capital withdrawals,” he says.
However, you should only make withdrawals if you have to.
Darius McDermott agrees that diversification – in terms of geography and asset type – is crucial. “Don’t rely on all your income coming from one part of the market,” he says. “The more sources of income you have, the better you will protect yourself.”
He believes bonds are currently looking relatively attractive – in terms of risk and reward – and highlights investment grade as particularly interesting. “They may only yield about 3-3.5%, but that is a lot higher than cash and there is also the chance for capital increases from these levels.”
Another investment to consider is infrastructure, although it’s not immune from the Covid-19 crisis as it includes toll roads and airports.
“Most areas are usually quite recession-proof and many are government-backed, so the income is also more resilient,” he adds.