Aiming for better returns

Taking risk with some of your money to achieve a sustainable retirement income

Sourcing a sustainable retirement income is essential, but you also have more options than ever before to help you find a solution. After you have made adequate provision for your essential needs, you may want to consider if you can afford to take any risk with some of your money to aim for better returns.

If you have been investing for a number of years, you’ll be familiar with the idea that ‘risk’ represents the chance for your investments to fall as well as rise in value. In general, higher-risk investments have a higher potential return, whereas lower-risk investments usually give a lower return. This still applies in retirement, but a bigger risk is the danger of running out of money too soon.

Factors to consider
Longevity – Rising life expectancies are undoubtedly good news. However, they are putting significant strain on both the state and private pension provision. In 1925, when the State Pension age was set at 65, average life expectancy for men was only 56*. By 2012, it had risen to 79.5, but the state retirement age – for now at least – remains at 65. When you are planning your retirement income, it is essential to consider carefully the risk of outliving the money you set aside for retirement.

Inflation – As prices rise over time, the real value of your money can be eroded. When you are working, your income generally gets inflation protection through annual pay rises. When you retire, inflation becomes much more of a risk if your income is not rising. This is why you may wish to invest some of your money with the aim of growing your capital – and, therefore, your income.

Between December 1988 and December 2014, the cost of goods and services in the UK increased by 97.8%. This means £100 in savings in 1988 would almost have had to double – to £197.80 – to buy the same basket of goods and services in 2014*. To look at it a different way, your capital would have to grow by
2.5% a year, on average, just to keep pace with inflation.
Income – We all want to have the finances for a care-free retirement, but this is becoming increasingly hard to achieve. In recent years, pensioners have faced persistently low interest rates and declining returns on assets traditionally used for retirement income, such as UK government bonds (also called ‘gilts’). The yields on UK government bonds are a key influence on annuity rates.

Risk and reward
It is important to keep enough cash available for short-term needs and to understand the potential risks involved in investing. While there are varying levels of income available across the different asset classes, assets that pay higher levels of income also have a higher risk of capital loss. Before you choose a particular income strategy, you need to be comfortable with the level of risk involved.

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