Richard Whitehall: The last 10 years have seen increased demand for products and solutions to generate income from savings. This has been driven by many factors, including increased pension flexibility, which has removed the anchor to annuities; long-term demographic changes, which increased the number of retirees and increased the time over which their investments need to provide income; and highly accommodative monetary policy, which has reduced interest rates and meant investors have been seeking income from a broader range of investment products.
The pitfalls that investors need to be wary of are many and varied. I would highlight the following. It's easy to be tempted by a high current headline yield. However, that may not be in the investors' best interests. A high yield may imply the product is too risky for the investor and may therefore expose the investor to larger drawdowns than they can withstand. And also, the high yield may be derived from a very narrow range of sources which again mean it's a greater risk for both the investors' capital and their income stream.
So, when investing for income, I think investors need to ensure their portfolio is appropriate for all of their investment needs, including the appropriate investment time horizon, diverse sources of income and therefore, overall, the appropriate level of risk, as well of course, the income level that meets their needs.
