All this week we bring you the best income opportunities across the globe, as picked by top fund managers, professional investors and our own stock and fund analysts as part of Morningstar’s Guide to Finding Investment Income.
Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Investec's David Aird.
Hi, David.
David Aird: Good morning.
Wall: So, it's income week, and today, we're talking about income and retirement. I thought we'd start with a bit of a shock tactic to get people in the mood. Average pension pot £25,000 or thereabout. What kind of income in retirement would that provide?
Aird: Well, we've seen annuity rates fall to around 4% for a single life annuity. But if we look at what markets potentially and money managers could potentially generate for clients and let's use, let's anchor to 5%, which I think is an achievable still quite hard to get, but an achievable income level. So, 5% on £25,000 is going to give you £1,250 a year, just over £100 a month or just over £25 a week, a lot many people that I know that can live on that.
Wall: I certainly would struggle on £25 a week. So, hopefully, that kind of shock tactic has encouraged people to save more. Let's delve a little bit more into that 5% figure, because to me, when you're looking at, you know, you get 1% from cash in the high street, the Bank of England base rate is still 0.25%, although may rise this year, 5% seems pretty punchy.
Aird: Yeah. Now, 5% is a good point to anchor to, but it's still quite a challenge and a stretch to get there. I think if you look around the world and much like our forefathers travelled the world trying to explore new lands, new promise lands for spices and silk and whatever else. I mean, today I think what we're doing as investors, investment managers, is we're travelling the world trying to find alternative sources of income that carry some risk but there's no free lunch in society as we know.
And so, if base rates, as you rightly say, are 25 basis points or 0.25%, how do we get to 5%? Well, U.K. equities and global equities could give you somewhere between 2.5% to 3%. High-yielding corporate bonds, which are not in certain cases particularly risky, may give you 6%. Emerging market debt might give you 8%. Infrastructure, as most governments are rebuilding their roads and rail networks, can give you a very sustainable conservative yield and property to a certain extent. So, there are many sources of income that can help the investor get to 5%.
Wall: I suppose also the thing to consider when you're in retirement and you are drawing an income from your investments is to focus on that income portion and not be concerned about perhaps the capital underneath it, because some of the assets that you talked about there, do traditionally have perhaps a higher risk premium than gilts or others government bonds where you may have previously been having your pension portfolio invested?
Aird: So, I think the answer there is really simple. If private clients are getting good advice from their advisors, it may well be that the right thing to do is to take cash from their portfolio every year, which is a mixture of income and capital, and there will be a gradual decline of that capital to potentially nothing. If the client is happy with that, then that's fine and anyone that potentially looks to inherit something will be sadly disappointed.
However, there are ways of just preserving your capital. I would say the better way would be to actually grow your capital at least in line with inflation so that the power of your money isn't eroded over time. And we certainly have got track records where we can refer back to keeping the capital value in line with inflation as well as generating an income of somewhere between 4% to 6%.
The real thing we must think about, if you look at the baby boomers in Generation X, one of the things they aspire to post the second world war is the better health service, higher-quality food and a higher standard of living. All of those are actually leading to people living longer. So, not only do we need more income to live on, but actually we're living longer. So, I would definitely err away from capital erosion and err towards capital preservation with a reliable and sustainable income level. That's the most important thing.
Wall: David, thank you very much. This is Emma Wall for Morningstar. Thank you for Watching.
