How to invest for retirement income – plus 3 fund ideas

Having enough income in retirement is one of the biggest concerns people have as they get older. While income can come from lots of sources, all of these will be some form of investment.

The most common source will be your pension. But you might also have other investments like a buy-to-let property, cash savings or part ownership of a business.

So, what are your options if you’re specifically looking to generate an income from your investments?

Bonds

Bonds are most commonly used for generating income across investment portfolios. Their alternative name of ‘fixed income’ being the main reason why.

If you invest in an individual bond and hold it until it matures, you’ll likely know exactly what cash payments you’ll receive between buying the bond and its maturity date. This makes it easier for you to plan your future cashflows.

But, there’s always the risk that the bond issuer will default and either not pay you what was initially agreed, or simply not pay you at all.

While it’s not that common, it’s partly why investing in a single bond can be risky. It often makes more sense investing in a portfolio of different bonds and the easiest way to do this is to invest in a bond fund. That way a specialist bond manager can do the hard work for you.

Bonds come in different flavours and can be very complex. But, broadly, there’s a scale of returns based on how creditworthy the bond issuer is. Generally, the more creditworthy they are, the higher their credit rating will be and the lower the rate of interest. The less creditworthy an issuer is, the higher the rate of interest. But there’s a bigger risk that the issuer won’t make all of their interest payments.

Shares

Company shares can be another useful source of income, paid in the form of dividends. Unlike bonds these aren’t fixed or known payments. Instead, they’re normally linked to company profits. That being said, most companies that pay a dividend try to maintain it at the same level or increase it each year.

How much you get from a dividend varies considerably from company to company, industry to industry and region to region. It’s often the large, mature companies that don’t need to spend lots on capital investments who pay the biggest dividends.

A special mention should be given to investment trusts. These are companies whose business is to invest. They’re similar to investment funds in many ways, so you could have a global equity investment trust for example.

There are a couple of key differences though.

Firstly, they can invest in things that funds can’t, like much less liquid investments. However, these investments are typically much harder to sell and are riskier.

Secondly, because investment trusts are companies, they’re able to manage their dividend payments like a company.

This means they can hold back some of the income they generate in good years, to supplement lower levels of income in poorer years. This smooths out their dividend payments over time, which can help you plan how much income you’ll likely get.

Remember though, yields are variable, and no dividend is ever guaranteed.

Yields are variable and not a reliable guide to future income. Source: MSCI and Refinitiv Eikon, 30/04/2023

Why invest for income at all?

Why not just invest for capital growth and then withdraw what money you need as you need it?

This is a reasonable question. The biggest challenge with this way of approaching investing during retirement is you could end up withdrawing money from your investments at the wrong time.

Most people will want to be generating a set amount of money each year from their investments. But markets go up and down and it’s likely that at some point you’ll need to withdraw money after a large market drop.

This can have a very negative impact on your long-term returns. And if you can’t hold out until markets recover and withdraw, you could miss the rebound.

Taking a natural income (interest from bonds or dividends from shares) helps with this problem. It means that if you do need to withdraw some money during a period of market stress, you’ll hopefully not have to take as much money out.

3 income fund ideas

Joseph Hill, Senior Investment Analyst

Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio. Investments and any income from them rise and fall in value, so you could get back less than you invest. This is not personal advice. If you’re not sure what’s right for you, ask for financial advice.

Yields quoted are variable and not a reliable indicator of future income. These funds can take charges from capital which can increase the yield but reduce the potential for capital growth.

Artemis Income

Artemis Income aims to provide investors with a steady and growing income, alongside capital growth over the long term. Managers Adrian Frost, Nick Shenton and Andy Marsh mainly invest in larger UK companies to achieve this. However, they’ll also invest in some medium-sized and overseas companies when they find great opportunities.

The managers look for companies with recurring revenues. That’s because these businesses will more likely still have consumers, profits, and therefore dividends, in the future.

They spend a lot of time assessing company management and think their ability to allocate capital efficiently is vital to making a success of the business. They aim to have a portfolio of between 50 and 70 companies with diversified cash flows.

We view this as a more conventional UK equity income fund that could work well alongside other types of investments in an income-focused portfolio. As of the end of March, the fund yielded 3.84%.

We think the managers’ combined skill, discipline and experience puts them in a strong position to deliver healthy income and long-term growth. But as ever, there are no guarantees.

FIND OUT MORE ABOUT ARTEMIS INCOME INCLUDING CHARGES

ARTEMIS INCOME KEY INVESTOR INFORMATION

Polar Capital European ex-UK Income

Polar Capital European ex-UK Income aims to deliver an income greater than that of the MSCI Europe ex-UK index. It also aims to grow investors’ money over the long term, with fewer ups and downs along the way. Nick Davis mainly invests in larger European companies that are undervalued, but have the potential to bounce back.

Davis aims to invest in cash generative companies with strong balance sheets and a competitive position that others struggle to replicate. He avoids companies he thinks aren’t capable of consistently achieving at least a 10% annual total shareholder return (TSR) on equity over the medium term. This lens takes into account dividend and earnings growth potential.

Given the fund’s income focus, Davis wants to invest in companies yielding at least 2.5%, with the potential to grow their dividends over time. The fund can be quite concentrated, and the manager has the flexibility to use derivatives which can magnify any gains or losses and increases risk.

We think the fund could be a good addition to an investment portfolio focused on income, or provide some diversification to other European or global funds focused on growth. At the end of March, the fund had a yield of 3.67%.

We like the defensive nature of the approach and the disciplined investment process.

FIND OUT MORE ABOUT POLAR CAPITAL EUROPEAN EX-UK INCOME INCLUDING CHARGES

POLAR CAPITAL EUROPEAN EX-UK INCOME KEY INVESTOR INFORMATION

Royal London Corporate Bond

Royal London Corporate Bond aims to provide investors with an income, alongside some capital growth from investing in investment grade bonds. Managers Shalin Shah and Matt Franklin believe credit markets are inefficient and offer opportunities that active managers can exploit.

The managers start by forming a view on the direction of the economy, considering factors like economic growth, inflation, and interest rates. This helps them decide which areas to invest in. Shah and Franklin feed off ideas from the wider fixed interest team at Royal London, but also do their own research.

We think the team’s edge comes from their detailed research into lower profile parts of the market. The fund has a focus on the lower quality end of the investment grade corporate bond spectrum which makes it a more adventurous option within the sector.

It also invests in some higher-risk, high-yield and unrated bonds, which can add risk.

We think the fund could work well as part of a portfolio invested for income, focused on the long term. It could also provide some bond exposure to a portfolio more focused on shares. At the end of March, the fund had a yield of 4.66%.

FIND OUT MORE ABOUT ROYAL LONDON CORPORATE BOND INCLUDING CHARGES

ROYAL LONDON CORPORATE BOND KEY INVESTOR INFORMATION

Our Wealth Shortlist is a selection of funds our analysts believe have the potential to outperform their peers over the long term. However, this is not a recommendation to buy.

For more information on these funds and their risks, including charges and the key investor information, visit the funds section.

Our 3 income fund ideas

Yields are variable and not a reliable guide to future income. Source: Morningstar, 31/03/2023