Investing for income: When you have to change with the times

As retirement looms, investment needs change.

FOUR YEARS ago, Jean Hind decided to go part time in the run-up to her retirement. She now works three days a week at her local library and plans to retire fully next year. Jean's lifetime habit of saving has made it possible for her to look forward to a comfortable retirement.

"I realised four years ago that I had built up a good enough pension and investment portfolio to enable me to cut down on my hours at work," she says. "My pension will be sufficient to cover everyday expenses, but it is the income from my investments that will pay for luxuries such as holidays abroad and my golf club membership."

In order to be in this position, Jean's investment strategy needed to change. Over the years she had saved money in a building society and invested for growth in unit trust funds and investment trust shares.

However, she needed to look at investments which would offer her a good income in retirement, says her independent financial adviser Rory Thomson, a director at James & George Collie in Aberdeen.

"Jean had a diverse portfolio, but we decided to reduce the risk and transfer into income-producing funds. We have moved away from equity investments into low-risk corporate bond income PEPs and low-risk with-profits bonds. As Jean is still working part time we have not needed to take the income from these investments, but when she retires we will," he explains.

The bulk of Jean's investment portfolio had been in three growth unit trusts: Perpetual UK Growth, Schroders UK Enterprise and Schroders European. Jean had not used her PEP allowance in the past, so Rory could not simply transfer the cash from one PEP fund into another.

Instead, he has sold units in the trusts each year and invested this money in corporate bond PEPs. In the last four years, Jean has transferred pounds 12,000 into the CU Monthly Income PEP and pounds 12,000 into the M&G Corporate Bond PEP. These funds offer an annual yield of 6 to 6.5 per cent.

The rest of the money from the original unit trusts has been invested in Commercial Union's with-profits bond and Scottish Widow's with-profits bond. These bonds are paying annual bonuses of between 6 and 6.5 per cent.

"The original growth investments produced next to no income because all the earnings were reinvested. In the last four years we have reduced the risk and moved over to investments that provide tax-free income of about 6 per cent, and there is the potential for capital growth," says Rory.

On top of this, Jean still has pounds 8,000 in a building-society account and a fully funded Tessa. She has also kept her investment trust shares, which should provide some growth; she hopes to move these into an individual savings account after April.

Jean is lucky enough to be able to switch to low-risk investments to provide her with enough money to supplement her income. But those requiring less income or greater capital growth than she is likely to achieve may want to stick to equity funds.

The first thing to do when moving from growth funds into income funds is to work out exactly how much income you need. The more income you need, the less opportunity there is for capital growth.

A unit trust fund in the UK equity growth sector will yield 1 to 3 per cent a year, but there is potential for capital growth - whereas a fund in the UK equity income unit trust sector will yield 3 to 5 per cent. If you have invested through a PEP, this income will be tax free and there is still the opportunity for capital growth to ensure a growing income over time.

If you need more income than this, a UK equity and bond income fund may be a better option, and often the income is paid out monthly. These funds invest in fixed-interest bonds as well as equities, so the income levels may be higher, but there is less potential for capital growth.

Alternatively, investors may want to move into a UK fixed-interest fund, whereby all your money is invested in fixed-interest assets such as corporate bonds. Income may be paid monthly or quarterly. The typical yield is 5 to 7 per cent.

For more income, you could invest in the income shares of a split-capital investment trust. The income on these shares can yield up to 9 or 10 per cent. These funds offer higher yields than other funds because the income shareholders make up only a percentage of the total number of shareholders in the fund, but receive all its income.

Before you decide to switch from a growth fund to an income fund, it is worth double-checking exactly what type of fund you are in, as it is not unusual for growth investors to invest in income funds.

If it turns out that this is what you have been doing, all you need do is to start drawing out the income from the fund rather than reinvesting that income for growth.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
ebooks
ebookPart of The Independent’s new eBook series The Great Composers
Life and Style
Suited and booted in the Lanvin show at the Paris menswear collections
fashionParis Fashion Week
News
i100
Arts and Entertainment
Kara Tointon and Jeremy Piven star in Mr Selfridge
tvActress Kara Tointon on what to expect from Series 3
Voices
Winston Churchill, then prime minister, outside No 10 in June 1943
voicesA C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
News
i100
News
An asteroid is set to pass so close to Earth it will be visible with binoculars
news
News
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs General

    Austen Lloyd: Private Client Solicitor - Oxford

    Excellent Salary : Austen Lloyd: OXFORD - REGIONAL FIRM - An excellent opportu...

    Austen Lloyd: Clinical Negligence Associate / Partner - Bristol

    Super Package: Austen Lloyd: BRISTOL - SENIOR CLINICAL NEGLIGENCE - An outstan...

    Recruitment Genius: Sales Consultant - Solar Energy - OTE £50,000

    £15000 - £50000 per annum: Recruitment Genius: Fantastic opportunities are ava...

    Recruitment Genius: Compute Engineer

    Negotiable: Recruitment Genius: A Compute Engineer is required to join a globa...

    Day In a Page

    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore
    'I'm gay, and plan to fight military homophobia'

    'I'm gay, and plan to fight military homophobia'

    Army general planning to come out
    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
    America: Land of the free, home of the political dynasty

    America: Land of the free, home of the political dynasty

    These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
    A graphic history of US civil rights – in comic book form

    A graphic history of US civil rights – in comic book form

    A veteran of the Fifties campaigns is inspiring a new generation of activists
    Winston Churchill: the enigma of a British hero

    Winston Churchill: the enigma of a British hero

    A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
    Growing mussels: Precious freshwater shellfish are thriving in a unique green project

    Growing mussels

    Precious freshwater shellfish are thriving in a unique green project