This article is part of Morningstar’s Guide to Investing Ideas for 2015, our comprehensive round-up of where the most promising stocks, funds and markets can be found this year.
Much is made of how to invest in the run up to retirement – funds and stocks that maximise returns to puff up your pension pot. But with so many of us living longer, it is just as important to perfect your post-retirement portfolio. The average worker may pay into a workplace pension scheme or personal pension for 20 to 30 years.
In the Sixties, life expectancy for the average Briton was 71 – meaning your pension pot had to last around a decade. Now, according to the Office of National Statistics, around 85,000 people aged 60 today are expected to survive until 100 years old. That means your pension scheme could be required to pay out for as long as you paid in.
With the new pension freedom coming into effect from April this year, nobody will be required to buy an annuity at retirement. Instead, you will be free to manage your own pension pot – withdrawing some as cash, reinvesting the money yourself, appointing a pension provider to run a growth portfolio for you, or choosing to invest all or part of your pot in an income-paying annuity.
For those who wish to self-manage all or part of their pension portfolio, income will remain a key theme. With Bank of England base rate remaining at the record level of 0.5% cash is not an attractive option, and bond rates are also at all-time lows.
As part of a balanced portfolio, equities still provide the highest-yielding source of income, despite a five year rally in developed markets. Using the Morningstar Fund Screener, we highlighted three of equity income funds which were highly rated by analysts and could help supplement your income in retirement.
Veritas Global Equity Income
This Morningstar Analyst Gold Rated fund ranks amongst the strongest offerings in its sector. The fund's standout characteristic is the extent to which the managers aim to deliver real returns to investors. They invest in companies with durable competitive advantages and strong, sustainable cash flows that can lead to dividend payments.
Artemis Income
This fund remains an outstanding choice in the UK equity-income sector and is Rated Gold by analysts. The managers are disciplined in applying a process that is proven over the long term. They seek cash-generative companies by applying cash flow and dividend screens to their equity universe with the help of SmartGARP - Artemis' proprietary stock-screening model.
M&G Global Dividend
This Silver Rated fund has a strong record of outperformance, even in market environments where income investing has been out of favour. Fund manager Stuart Rhodes' attention to dividend growth results in a more diversified fund than his peers, who rely on relative yield and tend to be more defensively inclined. The focus on companies increasing their income pay-outs can steer Rhodes to the faster-growing or more cyclically sensitive asset plays.
