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Invest to boost your retirement income By Rob Griffin
The basic state pension can't be relied upon to guarantee us a decent standard of living when we retire. Today's pensioners receive a measly £84.25 a week. As well as proper pension planning, the majority of us will also need to ensure By the time we enter our fifties, most of us will have accumulated a mixed bag of investments. As well as various cash savings, there's also likely to be a whole host of investment plans and share holdings. According to Andrew Merricks, head of investment at financial adviser Skerritt Consultants, this is the ideal time to carry out a pre-retirement audit on your finances as the next 10 years will be among the most important in your investing life. What you decide could make the difference between enjoying a comfortable retirement and struggling to make ends meet. "We usually find that people have bought and held investments since the late 1980s and through the 1990s,' he says. "Generally, they are also too exposed to the stockmarket." Balance your portfolio If you are in a similar situation, the solution is to re-balance your portfolio. However, before you can do this you'll need to establish just how much risk you are willing to take with your money. While accepted wisdom states that people should reduce risk later in life - for the simple reason that they won't have as much time to replace cash lost if the stockmarket slumps - this has to be balanced against the fact that we're all living longer. As a result your portfolio may well need to work harder and for longer, says Juliet Schooling, head of research at Chelsea Financial Services. The answer, she suggests, is making sure you have exposure to the four main investment worlds of cash, commercial property, bonds and equities. How much you invest in each area depends on your attitude to risk. If you have a medium tolerance you could well keep 10% of your portfolio in cash, 50% in bonds and split the remaining 40% among various equity income products, both within the UK and overseas. More aggressive investors, on the other hand, will probably have just 5% in cash, 40% in bonds and the rest in equities, while the risk-averse may favour 20% cash, 50-60% in bonds and the remainder in UK equity income funds. It's also important not to tie your money up for long periods, and to maintain as much flexibility as possible.' So let's take a look at some of the different income-generating products available. Savings accounts The simplest method - and an obvious starting point - is putting money in the bank in return for an agreed rate of interest. Justin Modray, head of communications at broker Bestinvest, is a firm believer in being able to lay your hands on some cash at a moment's notice. "It's probably wise to have a minimum of 5-10% of your portfolio in cash." However, it's worth shopping around for the best accounts. The interest rates available from these products can vary enormously. Take a look at the terms and conditions, rather than being seduced by the headline rate of interest. Some accounts may have a great headline interest rate, but this will actually include a bonus of, say, 0.65% which is only payable in the first year. When you're researching different accounts, you should also scour the small print to find out how long you will have to lock your money away for, the minimum and maximum investments allowed and whether you can get at your money through a branch or whether it's internet access only. One attractive product is the Anglo Irish Bank Easy Access Deposit account which offers an AER of 5.05% to investors. Although there is a minimum balance requirement of £500, no maximum is stated. Estimates compiled by Bestinvest show an investment of £10,000 would generate an annual income of £390. On the downside, the amount of income generated depends on interest rates and this obviously makes long-term planning quite difficult. Also, taking out and spending the income generated means your capital is not increasing. If you put in £1,000 today and take an income from it, in 10 years' time there will still be £1,000 invested, but its value will have been eroded by inflation. Bonds This is why it pays to consider other asset classes, the next of which is bonds. The easiest way to do this is by investing in a specialist bond fund. This will normally pay a better rate of interest than cash, in return for taking a bit more risk. The products range from gilts (government bonds), which often yield little more than cash, through to investment-grade and high-yield bonds. The latter are investments in less financially sound companies where you'll enjoy a higher income. A good option is to look at a strategic bond fund because the managers have a lot of flexibility as far as buying both investment-grade and high-yield bonds are concerned. Examples of such funds are the Artemis Strategic Bond fund, which has been managed by James Foster and Alex Ralph since its launch at the beginning of June 2005, and James Gledhill's New Star High Yield Bond fund, which is celebrating its fourth birthday this month. Commercial property While most people won't have the means to buy an office block, they can buy into specialist funds that do have this capability. People looking for income should stick to property funds that are heavily invested in actual bricks and mortar rather than shares in property companies as the latter will increase your exposure to the stockmarket. Among the more established funds are the New Star Property Unit Trust, which is managed by Roger Dossett and Stephen Whittaker, and Gerry Ferguson's Scottish Widows Investment Partnership Property Trust. Equities As far as the stockmarkets are concerned, income investors have the choice of investing in individual stocks - where they run the risk of being hit if the company suffers a downturn - or a fund run by an established manager. Unless you are comfortable with trading stocks, the latter is likely to be the most sensible option. If you want to focus on the UK, there's Neil Woodford's hugely successful Invesco Perpetual High Income fund, as well as the Jupiter Income fund run by Tony Nutt. Among the funds offering continental exposure is the Resolution Argonaut European Income fund, which is managed by Barry Norris and Oliver Russ. Aside from these individual asset classes, a number of spin-off products have emerged which offer exposure to a variety of different products. One such example is distribution funds, which invest in both bonds and equities. If you like the idea of a distribution fund, it's probably worth looking at those which split the equity and bond management between two managers, each of whom are specialists in their respective fields. A good example is New Star Managed Distribution. Although this fund is actually managed by Theodora Zemek, she is assisted by Toby Thompson on the equities side, while James Gledhill looks after the bonds. Taking that idea a step further is the Midas Balanced Income fund which offers investors an even broader mix of different investments, including equities, bonds and commercial property. Elsewhere, some income investors have gone for Guaranteed Equity Bonds, which promise a stockmarket-linked return if the market rises and the return of your original investment if it falls. However, there are different types. While most of the deposit-based products from banks and National Savings & Investments will return your capital in full, that's not the case with many other providers. The 'guarantee' that is often quoted, according to consumer advice from the Financial Services Authority (FSA), is usually followed by an 'if', which usually means the capital is only guaranteed if a particular stockmarket index meets certain conditions. So what's the overall conclusion? There are only four places you can make money - cash, bonds, property and equities. It makes sense to have something in each of them and a balance that suits your circumstances.
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