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How to generate an income from your savings
With the right mix of assets you can make 7% a year over the long term, says Mike Deverell of Equilibrium Asset Management.
Pensioners have been hit hard by record low gilt yields and interest rates.
For those relying on savings for income, inflation is the biggest danger. At present interest rates on cash (especially after tax) are typically far below inflation, so cash savings are shrinking in real terms.
Low gilt yields are also affecting annuity rates. This means that those using their pension funds to buy an annuity are receiving a much lower income than they would have done in the past.
The drawdown option
Luckily, annuities are not the only option for pensioners. Drawdown, which was previously only available to those with large pension pots, is now much more affordable and can present an alternative option for smaller pension pots.
Drawdown means your pension fund remains invested and you draw your income directly from it. The maximum you can take out is still limited by annuity rates, but by remaining invested, you can potentially beat inflation.
An appropriate asset allocation strategy is the best way of producing consistent returns and an inflation-proofed income, whether you are investing your pension fund or non-pension assets.
The good news is that, within each asset class, there are still some real income-generating opportunities.
Despite volatile share prices, many companies are actually doing very well. According to a recent report by Capita, the total dividends paid out by the UK market have just reached a new record.
The dividend yield on the UK market is currently 3.6%. This yield looks more than sustainable, with many companies hoarding cash and the 'earnings yield' on the UK market currently around 10%. The earnings yield is the theoretical yield if all earnings made by the companies were paid out. This means that the dividends being paid out at present are covered almost three times over by the earnings being made.
Equity Income funds focus on higher-yielding stocks. For example, the Invesco Perpetual Income fund has a yield of 3.8%, and the Artemis Income fund yields 4.6%. Remember it is not just the starting yield that is important, but the ability to grow those dividends, and the capital value, ahead of inflation.
Outside the UK, there is now a growing dividend culture, and there are now income funds covering almost every region. There are even emerging market income funds, which are riskier but with higher growth potential. The JP Morgan Emerging Markets Income investment trust has a yield of 4.4%.
If you prefer to outsource the geographical allocation of your portfolio to a fund manager, there are also global income funds such as the M&G Global Dividend fund.
More about this:
Look up the funds
- Invesco Perpetual Income Inc
- Artemis Income I Inc
- M&G Global Dividend A GBP Inc
- Jupiter Strategic Bond Acc
Look up the investment trusts
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