ANNUITIES
STILL A PLACE FOR
ANNUITIES
With this in mind, the investment
industry has sought to come up with
a range of solutions to the retirement
dilemma. Strategic bond funds were
an early option, perhaps blended
with a global equity income fund.
Multi-asset income funds are the
current hot favourite, with groups
drawing on their resources to blend
different income-generative asset
classes – bonds, equities, property
and alternatives – in a single,
dynamically managed fund.
Petronella West, head of
private clients at wealth manager
Investment Quorum, believes
that annuities still have a place in
some portfolios, depending on the
individual’s health and resources.
She also believes the muchtrumpeted annuity buy-back option
is unlikely to benefit many retirees,
pointing out consumers perennially
underestimate how long they are
going to live and overestimate
investment returns.
She says every alternative to
an annuity introduces a different
type of risk, adding: “Bond markets
have interest rate risk, and the US
is moving closer to an interest rate
rise. Also, investors now have to go
to the high yield market to find a
reasonable yield, but then there is
higher default risk. It is a difficult
time and it is very risky to put
together a strategy based entirely on
fixed income.”
Given the current environment,
West believes that a portfolio of
good quality equity income funds,
with the option to move into
lower risk assets such as bonds
when the environment changes,
is probably investors’ best bet. She
adds: “Investors must accept higher
levels of risk, but with global and
UK equity income funds, they need
to know what is under the bonnet.
Are they buying companies such
as Unilever, for example, or smaller
companies?”
A BIT OF BOTH
Jason Hollands, managing director
at Tilney BestInvest, agrees that no
single fund will provide the same
6
useful tool for generating income,
“INVESTORS MUST
while at the same time preserving
ACCEPT HIGHER LEVELS or even increasing capital, but they
need to be flexible. He adds: “They
OF RISK, BUT WITH
invest in different
GLOBAL AND UK EQUITY must be able todifferent stages of the
assets through
INCOME FUNDS, THEY
market cycle.”
NEED TO KNOW WHAT IS
ENHANCED INCOME
UNDER THE BONNET”
He believes investors need to ensure
degree of certainty and security
as an annuity. This means many
retirees should stick with them
or, depending on the size of their
pension pot, consider a combination
of an annuity purchase to secure a
basic income for life – perhaps to
pay for essentials – and a portfolio in
drawdown where they are prepared
to take more risk.
He says: “Ultimately a
drawdown portfolio, like any
balanced investment strategy,
needs a combination of equities
(to increase the portfolio’s value
ahead of inflation), fixed income
and commercial property for yield
diversification and some absolute
return to smooth out volatility.”
Gavin Haynes, investment
director at Whitechurch Securities,
says multi-asset income funds are a
they have some exposure to the
stock market and other risk assets.
For example, he suggests investors
consider enhanced equity income
funds, which use simple derivatives
to enhance their yield. Investors
may have to give up some growth
potential to obtain this higher
income, but this is less likely to be
a concern for retirees. Haynes says
investors should incorporate some
lower risk global equity income
exposure as well.
There is no single solution to
annuity replacement. The answer
will be a multi-asset portfolio of
some kind, whether that is a specific
multi-asset fund, or a blend of equity
income funds, bonds and alternative
income-generative investments
such as commercial property. The
right solution will also depend on
how much capital investors want to
preserve.