Built for income – how to fund a long-term retirement

With retirement often spanning decades rather than years, we explain an investment approach to consider for pension funds not based on defined benefits and other savings when looking for sustainable, long-term income.

Most people rely on the money they have built up in employer pension schemes over the years to provide them with the income they need when they retire. The question is, how do you generate that income?

Even if you are lucky enough to be a member of a defined benefits pension scheme that provides you with a guaranteed income for the rest of your life, you may be relying on additional savings, whether in pensions from previous employers, ISAs or other savings accounts, to supplement your retirement income. 

Providing a sustainable income

One key issue to think about if you are about to retire is how you can obtain a decent, long-term level of sustainable income that has the potential to last for the duration of your retirement. The traditional annuity with its guaranteed income may still be the preferred choice for many, but it is not necessarily the most suitable option for everybody. Increasing numbers of people are considering other ways of using their additional pension pots to generate income following the radical changes to pensions regulations that were introduced in 2015. However, the rules are complex and you should always consult a financial adviser before accessing your pension.

Monthly income from a variety of sources

Many people are now considering investing their pension funds in a multi-asset income fund. Multi-asset funds offer diversification by investing in a range of different asset classes, such as bonds, company shares, property, and alternative assets. 

This approach can be seen as a ‘not putting all your eggs in one basket’ style of investing. Investing in a fund that invests in many different types of assets and funds means that you are not overly reliant on a single asset or fund to provide the income.

Cashing-in units or shares versus natural income

Broadly speaking, there are two ways of obtaining “income” from an investment. One is selling units or shares. The amount of income you get depends on the number of units or shares sold and their price at the time this is done. Also, as you are selling some of your capital to get “income’, the number of units or shares you own will decrease over time, so your pensions pot may decrease in value faster than you expect, or even run out.

An alternative is to put your money into a fund that pays out natural income by investing in assets that generate income. The income can fluctuate over time but no units or shares have to be cashed-in, meaning that you will have your full number paying dividends for as long as you hold the investment. 

The value of your investment will fluctuate but because you are not selling parts of your capital, your fund should have the potential to grow over time. Crucially, a natural income can provide investors with a steady income stream even in troubled markets.

Find out more

If you have pension savings in schemes that are not based on defined benefits and would like to know your options for accessing them, get in touch now. 

Call 08000 85 85 90 or email appointments@lighthousefa.co.uk.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in.