While interest rates remain at their lowest level and hunger for higher yields keeps increasing, newly liberated retirees find themselves hunting for ways in which they could invest their pension pot.
A range of income-paying unit trusts has been launched since the pension freedoms came into effect in April this year. A number of retirees have also been investing their money in the real estate market and other alternative investments in order to diversify their portfolio away from the traditional drawdown or annuities. But while the options are vast, investment trusts are one vehicle that, although considered expensive and risky, could be ideal to provide the required returns.
Financial advisers suggest clients construct a ‘well-balanced’ portfolio when taking control of their pension pots. This means a portfolio in line with their post-retirement risk profile and flexible enough to be able to adapt as and when that risk profile changes. A number of advisers encourage clients to include investment trusts for this very reason.
“The way in which I use investment trusts is to get additional returns for clients, because if you look at any Money Management table over 10 years, investment trusts always outperform unit trusts,” says Ray Best, an independent financial adviser at Berkshire-based Una Vida Life Planning. “Very rarely do investment trusts underperform unit trusts over a 10-year period. These are average figures, and if you take a good investment trust, it will perform far better than the average.”
Data from Morningstar supports this, showing investment trusts’ outperformance over every timescale.
Meanwhile, the Chart shows the total assets under investment trusts from 1980 onwards. They are clearly, but steadily, growing in popularity.
Unique advantages
Many advisers point out that investment trusts have several advantages over open-ended funds. Apart from paying dividends out of the income they receive from investments, these companies can also pay dividends out of the profits they make when they buy and sell investments. This is income valuable for investors in retirement.
Unlike other types of funds, investment trusts are entitled to keep back up to 15 per cent of the income they earn each year for their reserves. This gives them a buffer from which income payments to investors can be made in years when the fund’s earnings disappoint. Advisers say this is something that could appeal to retired investors who need a consistent income especially as they plan to live off the income generated by their life’s savings.
Furthermore, according to the Association of Investment Companies (AIC), investment trusts can be a useful part of a Sipp portfolio due to the advantages of the structure: good long-term performance due to gearing, their closed-ended structure, from an income perspective they have a good deal of flexibility, and – with shareholder approval – they can pay income out of capital.
But many will still stay away largely because of their being labelled as ‘risky’.
“Investment trusts are always looked at as being high-risk, but if you have a large discount in investment trusts, in particular if it is trading at the end of its range that is towards the largest discount rate on average, then I don’t view them as high-risk,” says Mr Best. “I view them as actually relatively low-risk. But they could potentially produce additional returns.”
