![]() This represents an increase of 116% over 20 years. Research by the AIC using data from Morningstar reveals that a £100,000 investment made on 31 st December 1995 in the average UK Equity Income investment company would have grown to £215,874 by the end of 2015. They are helped by the fact that they can gear their returns (borrow to invest) and in many cases have lower ongoing costs that their open-ended equivalents. ![]() If all goes according to plan, an investment company should be able to generate an increasing stream of income that outpaces inflation, while also growing their capital over time. The likes of Tesco, Glencore, Antofagasta, Standard Chartered and Rolls Royce have already cut their pay-outs and others are expected to follow suit. Many people think that 2016 will be a difficult year for dividends, with some of the biggest companies on the London Stock Exchange having to reduce their distributions to reflect the fall in their earnings as a result of the slowdown in the global economy. Open-ended funds have no such protection. It’s easier for investment companies to do this because the managers can set aside some of the income in the reserves, which they can draw on whenever their underlying holdings unexpectedly cut their dividends. A further 18 have done so for between 10 and 20 years. The Association of Investment Companies (AIC) has identified 19 funds that have successfully increased their dividends each year for at least 20 years. Investment companies domiciled offshore can transfer as much as they want as they are not subject to the 15% upper limit. They can then use the money to smooth the dividends so that investors are able to enjoy a steadily increasing level of income. UK domiciled investment companies have more flexibility as they can transfer up to 15% of their annual income to their revenue reserves. This means that the annual dividends will tend to fluctuate and could be higher one year than the next, which could be quite a challenge for retirees who are dependent on the distributions to maintain their standard of living. The problem with open-ended funds is that they have to distribute all of the income they receive during their financial year. Most of those who opt for drawdown will want to invest their portfolio in a number of different funds, as these provide a professionally managed exposure to the markets and a much greater level of diversification than would otherwise be possible. This would leave the underlying investments intact thereby improving the chances of long-term capital growth and a gradually increasing stream of interest and dividends. The safest way to do this is to limit the withdrawals to the natural yield of your portfolio, which means that you will only take out the income and not the capital. Normally this would include different asset classes such as shares, bonds and cash so as to limit the impact of market falls and to provide more consistent returns.Īnother important consideration is not to take out too high a level of income that it depletes the remaining value of your fund. The most obvious of these is that you need to make sure that you have a sufficiently diversified portfolio. The problem is that it is harder to make up for any losses when you need to continue to take an income from the same investments, although there are several safeguards that you can put in place to minimise the potential risk. ![]() In most cases it would be people with other reliable sources of retirement income such as a company pension, or those who have used part of their fund to buy an annuity that would fall into this category. They worked out that a drawdown plan of £100,000 invested in a mixed portfolio of assets on April 7 th 2015 would have fallen to £86,522 by the end of January after taking out income equivalent to the prevailing annuity rate of £5,571.ĭrawdown would only be suitable for those who are comfortable with this sort of risk to their capital. Unlike an annuity they keep full control of their assets and can pass on the residual value to their beneficiaries, but they need to be comfortable with the ongoing risk to their capital.Ī recent report by pension specialist Retirement Advantage calculated that drawdown investors could have experienced an 8% average loss in the value of their pension fund. Those who opt for income drawdown can leave their pension fund invested and take out whatever income they want as and when they need it. This is equivalent to an average fund value of almost £65,000. ![]() According to data from the Association of British Insurers, 43,800 people invested a total of £2.85bn in these plans in the first six months after the change in the rules came into effect. The new pension freedoms that were introduced in April 2015 have been widely welcomed with one of the most popular features being income drawdown. As seen in the latest issue of Master Investor Magazine.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |