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A retirement income of £10,000 from your pension might sound modest but with fewer bills to pay and when pared with the State pension – currently £8,767.20 per year – it is an amount that most should be able to live on.
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. Having previously tackled a higher £300,000 portfolio, this week we look at those that have amassed £200,000 in savings.
A £10,000 figure was surprisingly difficult to achieve with £300,000 so with £100,000 knocked off the starting point it only got trickier. The required 5pc yield is only achievable by investing in stocks and riskier assets, despite once being easy through low-risk savings accounts.
Rachel Winter of financial advice firm Killik & Co, has put together a portfolio that will provide £10,000 annual income. However, because of the tight requirements it will require selling investments rather than only coming from dividends.
The portfolio will have 80pc invested in stocks – either directly or via funds – and 20pc in "alternative assets" like infrastructure. Investors could get a 5pc yield just by only owning stocks, having Ms Winter said the portfolio would be too exposed to high-yielding oil companies and miners which is unsustainble.
“Although these companies currently offer high yields, their growth in recent years has been paltry and they look increasingly risky given that growing numbers of investors are moving away from fossil fuels,” she said.
Being global is also important to spread the risks. The portfolio will have 20pc in British companies, 26pc each in European and American stocks and 8pc in China.
Combined with the "alternatives" the portfolio will yield £6,126. As global stock markets return 5pc a year, on average, investors should proportionately sell gains to generate an income of £10,000 without the portfolio ever falling below the £200,000 starting point.
Ms Winter’s portfolio has £30,000 invested in tech stocks such as Microsoft, Amazon and Alibaba. This is an area often neglected by income funds as they tend not to pay a dividend. However, high share price growth can make up for this.
“Amazon’s share price has grown far more than 5pc per year but it does not pay a dividend, so would be overlooked by income funds,” she said.
The portfolio is split across multiple industries to spread the risk of one sector suffering from decline. Some £15,000 is invested in healthcare – another high-growth area – while financials, energy and mining stocks – three of the largest dividend-paying sectors – account for £50,000 and generate the bulk of the income.
British companies Shell, the oil giant, and miner Rio Tinto are the highest-yielding stocks, yielding 7.4pc and 6pc respectively.
Where to invest your money to withdraw £10,000 per year
Although oil is under pressure from a switch towards renewable energy, Ms Winter said it has a high exposure to gas and is expected to be an important part of global energy supply.
Rio Tinto is shielded from any slowdown in mining by also being a low-cost steel manufacturer – a product in demand as economies push on with infrastructure spending.
Some £10,000 has been invested in Chelverton UK Equity Income – which owns British smaller companies that pay an income.
“Smaller companies have also historically offered good returns and it makes sense to include them in a portfolio that has an high return target,” Ms Winter said.
Although it is usual to include bonds in order to reduce risk and volatility in a portfolio, it would mean investors needing to take more risk elsewhere. Ms Winter said: “A good alternatives to bonds is real estate investment trusts and infrastructure funds, while offer reasonable yields with less volatility than the equity market.”
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In particular, LondonMetric, a Reit, invests in logistics warehouses. The niche market is growing on the back of the rise in e-commerce, with larger, more innovative storage units required.
Meanwhile 3i – a behemoth infrastructure investment trust– has “an excellent track record” of both growing capital and paying a sustainable, consistent income.
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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