The Importance of Sustainable Income

The Financial Times recently quoted that 75% of the World's assets will be owned by baby boomers in the next 5 years. The demand on income producing funds is unquantifiable, especially when you consider the last recession and continued low interest rates. In fact, investors who rely on cash to deliver their income have seen their income slashed by 90% since the start of the recession. Back in 2008 it would be fairly easy to achieve over 5.5% from cash alone, whereas in 2015, naturally occurring income from investment struggle to reach this rate within the lower risk spectrum.

Clearly new legislation, coming into effect from this April, will have a huge impact and change the way in which pensioners access income in the future. So can we be trusted with our own money? Probably not. The need for good advice is more important than ever.

Consider an average investor. Perhaps in their mid 60's and looking forward to (hopefully), a long retirement. They are not looking to take huge risks with their capital as it may need to last them for 30 years or more. Looking for a consistent return, with minimal stress, bank interest rates can no longer provide a suitable benchmark. We prefer clients to set their own (with our help!) It is important to factor in the effects of inflation, somewhere up to 2-3%(approx.), charges made by the fund manager and our advice costs, which could add another 1.5-2.0% (approx.), meaning that before any 'sustainable' income is available, the fund needs to achieve at least 5%.

Most retirees will benefit from the State Pension (currently £113pw) and hopefully Additional State pensions including SERPS and S2P meaning that around £7,000 could be provided from this source. Using easy maths, a fund pot of £200,000 and an income need of £1,000pm, a fund would need to consistently achieve at least 7.5% to fund the income, charges and mitigate the effects of inflation.

It is, of course, also important to factor in tax implications to ensure any liability does not eat into required income and that any ad hoc taxable lump sums, (over and above tax free cash) leave adequate capital to sustain income going forwards. This is no longer one off annuity advice, this is advice for life.

Simon Linstead DipFA MIFS, Managing Director of Nurture Financial Planning