Premier Miton Investors
Rethinking Retirement Income
By Simon Morris, Strategic Partnerships Director at Premier Miton Investors
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Destination retirement?
A regular topic of conversation with clients is retirement income. We think there are two very good reasons for this. One is the rapidly growing size of the market, the other is lack of products being offered by the asset management industry that fully address this market.
Demographic trends are important when thinking about the growing need for these types of investment solutions. When considering the UK, we can see from United Nations World Population Prospects 2022 data there is a rapidly growing cohort of individuals entering the late career/retirement phase of life, while the category of mid-career savers is starting to shrink.
Indeed, the picture is even starker when you consider that the 50 plus cohort is set to grow in the next 30 years. This is the cohort that is either in retirement or needs to be planning for retirement.
This is rapidly changing, the fastest growing area of the industry is post-retirement now, yet the industry remains tethered to risk targeting, ignoring the elephant in the room. Clients are going to need income; the volatility of their capital is much less an issue than their need to draw a consistent income level from their portfolio.
We think this is where natural income comes into play. A properly constructed and managed portfolio designed to generate a stable and growing stream of income, much closer matches a near-retirement or post-retirement client’s needs.
Time to rethink retirement income?
At Premier Miton we are strong believers in the use of ‘natural income,’ particularly for post- retirement clients. Rather than relying on the vagaries of asset prices, we think a much less risky strategy is to draw an income from a portfolio in the first instance. Whilst this may seem obvious it certainly has not been a popular approach in recent years.
We have only recently come out of a period of low inflation and low interest rates. In this environment, growth strategies typically do well and income less well. Income funds fell out of favour and advisers became accustomed to using unit encashment to fulfil client’s cash flow needs.
We think the job of a fund marketed as providing a reliable source of income is to prioritise the income. This means understanding the fund’s income receipts and distributions and forecasting them over time, rather than considering the fund’s yield in isolation.
For this reason, we think that consideration of income gives an advantage in terms of total return, particularly in this new environment of higher rates and higher inflation.
Trimming and tacking
Taking an active approach to income management is vital. For example during the covid crisis, a number of equities ceased their dividend payments because of economic uncertainty. At the same time bond yields fell precipitously, for the same reason. For an income manager, the lost income from cancelled payments was a problem. You needed to replace this income. With equities having fallen, and bonds having risen, the natural course of action was to buy more equities, funded by bonds – a decision that proved to be a sensible one.
Another example of our income thinking was the UK pension crisis last Autumn. Bond yields were driven higher, arguably because of forced selling, in a huge spike. Consequently, some very attractive nominal yields were available for a period, in very good quality corporate bonds.
Design thinking
We think it is down to the investment management industry to better design products to meet this rapidly growing client need.
In our view, an income strategy does not need to compromise total returns. Considering income can be an advantage, as it forces the manager to consider the real value of assets over time. In our view, the real long-term value of an asset is the cash it can return to its owners now and in the future.
Risks
The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.
Forecasts are not reliable indicators of future returns.
Important Information
For Investment Professionals only. No other persons should rely on the information contained within.
Whilst every effort has been made to ensure the accuracy of the information provided, we regret that we cannot accept responsibility for any omissions or errors.
The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Issued by Premier Portfolio Managers Limited. (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.
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The elephant in the room
The savings and investment industry has typically focused on the capital accumulation phase, for obvious structural reasons. Until recently, clients were ultimately compelled to buy an annuity. So post-retirement income was not a focus of the industry, the life insurance companies were going to take over at some point. This is no longer the case.
The initial impact of pension freedoms was to increase the potential pool of pre-retirement clients who could benefit from better control over their pension savings. These clients are now moving into near-retirement and post-retirement and their needs have changed.
The capital accumulation focus led to products designed to meet various levels of risk and expected capital growth. This was obviously appropriate with the majority of clients in accumulation phase and especially with growth being a favoured investment style.
