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Having a reliable retirement income is the main goal for most investors yet it requires significant savings to get there.
In a three-part series, Telegraph Money will look at how investors can generate an annual £10,000 income from pension pots of different sizes. First, we look at those that have amassed £300,000 in savings.
Although this sounds straightforward, investors would still need to invest a large proportion in risky assets like stocks. The portfolio would need to yield 3.3pc, and given interest are so low there’s little scope for using low-yielding cash or even safe assets like government bonds.
Nick Wood of Quilter Cheviot has designed a portfolio to help guide investors. He said 70pc of the portfolio should be held in funds or investment trusts that focus on income, while the remainder should be in investments that can grow your money, or add safety, such as gold.
The example portfolio will eventually be split with 69pc in stocks, 18pc in debt and bonds and 13pc in a mixture of gold and niche assets like private equity, as the below chart shows, via 19 funds.
Mr Wood said half of the stocks and shares funds should be focused on Britain as owning domestic companies valued in the pound removes the risk of currency movements affecting income.
The City of London investment trust and the JO Hambro Capital Management UK Equity Income funds were his favoured two. They yield 4.3pc and 5.4pc, respectively. Mr Wood said investing £27,000, or 9pc, of the portfolio in these two funds would generate more than £2,500 worth of income over 12 months.
The £1.9bn City of London trust, which is also on the Telegraph 25 list of our best funds, has an excellent track record of protecting capital and growing its dividend. The JO Hambro fund has been one of the top 10 best income funds in the past decade.
Some £18,000 should be held in income-focused Temple Bar investment trust and the same in Liontrust UK Growth – a low yielder but superb British stocks strategy. Another £9,000 should be invested in smaller British stocks via Montanaro UK Income with the combined portfolio in domestic stocks providing £4,000 income off just £99,000 investment
However, Mr Wood said that investors would do well to have some their savings in foreign stock income funds, despite the currency issue. He allocated £36,000 to the passive Fidelity US Quality Income ETF, which owns high-yielding American stocks, and pays out 2.6pc as income. A further £24,000 went into the HSBC American Index fund.
Mr Wood said he preferred passive funds when investing in America as active managers did not have a great record of beating the market.
The funds to invest your money in for a £10,000 income
Some £108,000 of the portfolio is invested in non-British stock funds, but this only produces £2,800 of income as it includes funds that operate in lower-yielding markets such as Japan and Asia.
Turning to the remainder of the portfolio, Mr Wood said careful attention should be paid to bonds and alternatives. Government bonds do not yield enough, he said, and so he picked bond funds focusing on corporate debt through three funds.
He also added in Sequoia investment trust, the portfolio’s highest yielder at 5.3pc which it achieved by lending to infrastructure projects. Property, private equity and infrastructure funds all have a place as does a holding in gold, through an ETF, despite it not yielding an income.
“It might seem like an odd choice here given we need income, but this is somewhat of a small insurance policy for more difficult times, when gold might perform well relative to other asset classes,” Mr Wood said.
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The portfolio should achieve £10,000 per year in income without having to sell any investments.
Mr Wood added: “While its value of the overall pot may fall occasionally, investors have time to wait for them to rebound safe in the knowledge that they are not living beyond what the portfolio can sustain.”
This is not a ready made portfolio but a suggestion of how investors should think about approaching gaining income alongside potential fund ideas.
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