The pension freedoms which are being introduced on 6 April 2015 will give those over the age of 55 much more flexibility about how they manage their investments throughout their retirement.
While pensioners no longer have to purchase an income for life in the form of an annuity, they do still face the issue of having to provide themselves with an income that will last them throughout their retirement, however long that may be.
Without taking a level of investment risk, these investors are in danger of eroding their capital more quickly and potentially running out of money or having to make changes to their lifestyle. For many people being able to leave an inheritance behind for their loved ones is also an important consideration.
Put simply, these investors are now faced with drawing an income for life from a savings pot which often has no guarantees built in and they are reliant on the investment return to provide all or some of the income that they need.
And this is all set against a backdrop of persistently low interest rates and investors who, having been marked by the experience of the last five or so years of investment volatility are increasingly looking for a cautious, balanced approach to portfolio investment construction.
When an investor is thinking about taking an income from an investment portfolio, there are essentially two choices; whether it is the underlying assets within the portfolio that should deliver the income or whether the product wrapper should deliver the income.
Depending on which route is chosen, the assets you would invest in could be quite different.
Taking the first route and relying solely on the regular payments from the underlying investments would mean you would need to invest into assets which deliver steady income, for example bonds and property, or a growing income, such as blue chip equities with a good dividend paying track record.
The other option would open up an enormous range of assets that would otherwise be excluded, particularly if you were prepared to co-invest with other investors in a large multi-asset fund. This way individual retail investors are afforded a greater degree of protection. What this means in practice is that they now have access to assets that are perhaps more complex to understand, may require a substantial minimum investment or may be deemed as being too illiquid.
Using the services of a professional fund manager, who is expected to understand, means the portfolio can contain assets that may produce longer-term income streams and less volatile valuations. These assets include infrastructure such as hospitals, schools, bridges and ports as well as private equity where the investor could be investing into the talent of the next generation of engineers, designers and captains of industry. These are potentially risky but co-investing could reduce the risk substantially.
The benefits of a well-diversified fund are, of course, well known, and I would question why anyone would want to reduce the universe of investable assets simply to receive the dividend or interest payments from the underlying stocks.
