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Investment ideas

Drawdown
investment ideas

Six fund ideas for generating income without drawing from capital

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Investment ideas

Mark Dampier
Head of Research

Important: The information on our website is not personal advice but we can offer advice if specifically requested. What you do with your pension is an important decision, which could be irreversible. Drawdown is a more complex option than an annuity. Make sure you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you are unsure. The Government's free Pension Wise service can help. It provides impartial guidance face-to-face, online or by phone - more on Pension Wise.

What is drawdown?

Drawdown requires you to take control of your retirement income, including where you invest. Income is not secure and the value of investments can rise and fall. It is not the kind of plan where you can sit back and let it run itself.

You'll need to think about your income requirements carefully and choose investments accordingly.

With drawdown it's much harder to recoup investment losses when you're reliant on those same investments to provide income and you are no longer working or contributing to a pension. Depending on the size of your pension, and the income you draw, you may need to stop taking the income during volatile periods - for instance 18 months - while values recover. If this would be difficult for you, or if you cannot face the prospect of losing money, drawdown probably isn't going to appeal to you.

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Three strategies for taking income - which one is most aligned with your own goals?

Drawdown is very flexible and can be used in any number of ways. There is no such thing as a typical drawdown investor. However there are common approaches to taking income, which correlates to how your drawdown pension might be invested. We outline these below.

Take only the income generated by the investments

One option is to draw the income generated by the investments themselves, known as the natural yield. This is my preferred approach as it does not involve drawing from capital.

More on natural yield

What next? We have provided some fund ideas for taking natural yield below.

Simply leave the fund to grow (taking no income)

Some investors may not require any income at all and can afford to leave the fund to (hopefully) grow after taking tax-free cash, although please remember the fund could also fall in value.

What next? You can choose a portfolio for growth, income, or whatever meets your needs. You might be interested in our new Portfolio+ service.

Draw from your pension capital

Another option is to draw from capital (selling investments to generate income). In my view this is a higher risk strategy.

More on why it's higher risk

What next? Because of the increased risk or running out of money by drawing from capital, you should strongly consider taking advice that drawdown is the right course of action for you.

Drawdown investment ideas: six funds to consider for natural yield

Please note these investment ideas are not a personal recommendation to invest and you should choose investments based on your own preferences and research. Ensure you read the Key Investor Information Documents and Key Features before making any investment.

Individual Investment funds

Investors who prefer a more hands-on approach can use individual funds to construct a personalised portfolio. The Wealth 150+ is our selection of what we believe are the best funds available to UK investors. Below are four Wealth 150+ funds we believe offer first-class performance potential.

Yield
3.50%*

CF Woodford Equity Income

  • Neil Woodford is the outstanding equity income manager of his generation
  • This fund combines well-established high-yielding businesses with smaller firms he feels are capable of dividend growth

Key Investor Information Document

Read our view

Yield
4.63%*

EdenTree Higher Income
(formerly Ecclesiastical)

  • A global multi-asset portfolio invested in shares, bonds and cash
  • Manager Robin Hepworth has decades of experience and a strong track record

Key Investor Information Document

Read our view

Yield
3.10%*

Henderson Cautious Managed

  • Invests in a balanced portfolio of shares, bonds and cash
  • Chris Burvill considers the economic environment and adjusts the fund's positioning between shares, bonds and cash depending on his outlook

Key Investor Information Document

Read our view

Yield
4.75%*

Marlborough Multi Cap Income

  • Seeks attractive dividends and capital growth from smaller and medium-sized companies
  • Could provide useful diversification to a more traditional, larger company focused income portfolio

Key Investor Information Document

Read our view

Multi-Manager funds

An HL Multi-Manager fund offers a diversified portfolio of funds in one simple investment. Each HL Multi-Manager fund is managed by our experienced team. We believe that the benefits of this approach justify the extra cost associated with a multi-manager fund. The HL Multi-Manager funds are run by our sister company Hargreaves Lansdown Fund Managers.

Est. yield
4.50%*

HL Multi-Manager High Income

  • Our experts' harness those they consider the best income-focused equity and bond funds in a single investment
  • Aims to distribute a monthly, high income to investors which can grow over the long term

Key features

Read our view

Yield
3.91%*

HL Multi-Manager Income & Growth

  • Aims to generate an attractive income and capital growth
  • Our experts' favourite equity income funds in a single investment

Key features

Read our view

*Yields are variable and not guaranteed

Keeping a cash buffer

We suggest any drawdown investor should consider holding at least two years’ income as cash. This lets them take the income they need without having to sell investments each time. If the market should fall, there is a cash buffer from which to draw income. This allows an investor to sit tight and wait for some recovery, whilst still receiving an income. However, investing in cash is typically a short-term strategy. While cash can protect the value of the fund short term, it is unlikely to be a good long-term strategy as there is no growth potential.

The importance of diversification

All investments carry risk. While investment risk can't be eliminated altogether, the traditional way to reduce its effect is to use a diversified spread of investments. The impact of picking the wrong asset type, the wrong region, or the wrong sector can be reduced if a portfolio covers a range of assets, regions and sectors.

Investors should seek a selection of funds in each sector they like and try and get a spread across different fund managers so that you are not over-exposed to any one particular investment style.

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HL Multi Manager

HL Multi Manager Income & Growth

Our view

There is no shortage of great equity income fund managers. Yet with so many managers, each with their own investment style, selecting the right ones can be daunting. One solution is the HL Multi- Manager Income & Growth fund, which is a diversified portfolio of our favourite UK equity income funds in one simple investment.

The core of the fund is invested with managers who predominantly invest in larger companies in robust financial health, capable of paying attractive dividends. There is also exposure to smaller and medium-sized companies which have the potential to grow dividends over time; and some exposure to overseas companies.

£10,000 invested, when the trust launched in October 2002, would have generated over £8,121 in income to date and the original £10,000 would have grown to £19,492*. In addition, dividends paid by the fund have risen in all bar two of the 13 years since launch. Please remember past performance is not a guide to future returns.

The HL Multi-Manager Income & Growth fund is run by our sister company Hargreaves Lansdown Fund Managers.

*Source: Lipper IM to 1st June 2016

Annual percentage growth (income reinvested)
June 11 -
June 12
June 12 -
June 13
June 13 -
June 14
June 14 -
June 15
June 15 -
June 16
HL Multi-Manager Income & Growth -3.67% 31.75% 13.03% 13.68% -4.81%
IA UK Equity Income -7.36% 30.60% 12.28% 9.28% -4.28%

Source: Hargreaves Lansdown as at 01/06/2016. Past performance is not a guide to future returns.

Charges

Net initial charge: 0.00%
Ongoing charge (OCF/TER): 1.32%
Ongoing saving from HL: 0.00%
Net ongoing charge: 1.32%

Key features

The charge to hold funds in the Vantage Service is 0.45%. Where savings are paid as loyalty bonus, they may be subject to tax in the Fund & Share Account. View our charges.

View factsheet Invest now

HL Multi Manager

HL Multi-Manager High Income

Our view

Many of the traditional sources of income have evaporated. Many instant access deposit accounts offer no interest at all, while 10- year UK government bonds yield a historically low 1.45%.

The HL Multi-Manager High Income fund offers a solution and aims to distribute a monthly, high income to investors. To help achieve this, the managers will look across the entire investment spectrum to identify areas they feel offer the most attractive yields. The fund’s yield is expected to be 4.5% (variable and not guaranteed). Although, unlike the security offered by cash deposits, the fund’s value and income offered will rise and fall, so investors could get back less than they invest.

The share element of the portfolio provides a good starting income, plus the majority of the income and capital growth potential over the long term. The fixed interest element performs two important roles, the main one being to deliver a high income - corporate bonds currently yield in the region of 3.2% and higher-risk, high-yield bonds almost 6.6%. Bonds also bring diversification and smooth out some volatility compared with a fund invested entirely in shares.

By blending different types of funds, constantly reviewing and adjusting the portfolio when more attractive opportunities emerge, the aim is to distribute a monthly, high income to investors which can grow over the long term.

The HL Multi-Manager High Income fund is run by our sister company Hargreaves Lansdown Fund Managers.

Charges

Net initial charge: 0.00%
Ongoing charge (OCF/TER): 1.33%
Ongoing saving from HL: 0.00%
Net ongoing charge: 1.33%

Key features

The charge to hold funds in the Vantage Service is 0.45%. Where savings are paid as loyalty bonus, they may be subject to tax in the Fund & Share Account. View our charges.

View factsheet Invest now

CF Woodford Equity Income

CF Woodford Equity Income

Our view

Neil Woodford is widely regarded as one of the finest managers of our time. Over the years he has made some incredibly astute calls, demonstrated by his superb record, although remember past performance and success is not a guide to the future.

Around two thirds of the fund is invested in large well-established businesses such as BT and GlaxoSmithKline. These companies supply goods and services consumers consider essential, which helps maintain robust sales and high dividends. Such companies have also tended to survive whatever the economic climate.

Neil Woodford also looks for tomorrow’s dividend winners amongst higher-risk small and medium-sized companies, including unlisted businesses. This means that as well as offering an attractive yield there is the potential for income and capital growth.

Charges

Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.75%
Ongoing saving from HL: 0.15%
Net ongoing charge: 0.60%

Key Investor Information Document

The charge to hold funds in the Vantage Service is 0.45%. Where savings are paid as loyalty bonus, they may be subject to tax in the Fund & Share Account. View our charges.

View factsheet Invest now

Henderson

Henderson Cautious Managed

Our view

This fund aims to generate an attractive total return over the long term, combining the potential for both income and capital growth, by investing in a balanced portfolio of shares, bonds and cash.

Chris Burvill considers the economic environment and adjusts the fund's positioning between shares, bonds and cash depending on his outlook. The manager believes different assets tend to perform well at different points in an economic cycle. By adjusting the portfolio between different asset classes, he aims to harness some of the long-term growth of shares, while mitigating some of the volatility associated with investing in a pure equity portfolio.

The equity element of the fund is largely focused on high-yielding, UK shares and he does not invest in commodities or currencies. We believe he is a high quality fund manager with a commendable track record and his straightforward investment approach has seen this fund in good stead over the long term, although past performance is not a guide to future returns.

Charges

Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.71%
Ongoing saving from HL: 0.075%
Net ongoing charge: 0.635%

Key Investor Information Document

The charge to hold funds in the Vantage Service is 0.45%. Where savings are paid as loyalty bonus, they may be subject to tax in the Fund & Share Account. View our charges.

View factsheet Invest now

EdenTree

EdenTree Higher Income

Our view

Fund management is awash with star names, but a closer look reveals unsung heroes who deserve the same recognition. Robin Hepworth of EdenTree Investment Management is a prime example and has been lead manager of the EdenTree Higher Income Fund since its launch in 1994.

As a multi-asset portfolio, the fund typically holds around 70% in shares and the rest across other investments such as bonds and cash. The fund provides broad diversification and at present comprises around 180 holdings. Robin Hepworth favours companies in robust financial health, paying good dividends.

His approach focuses on out-of-favour companies whose share prices have fallen, but have the potential to recover. It is a genuinely contrarian and active approach that has performed exceptionally well over the long term. However, remember past performance is not a guide to the future.

Charges

Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.80%
Ongoing saving from HL: 0.35%
Net ongoing charge: 0.45%

Key Investor Information Document

The charge to hold funds in the Vantage Service is 0.45%. Where savings are paid as loyalty bonus, they may be subject to tax in the Fund & Share Account. View our charges.

View factsheet Invest now

Marlborough

Marlborough Multi-Cap Income

Our view

Equity income funds usually concentrate on larger, well established companies. This means investors can miss out on the outstanding growth potential of smaller and medium sized companies. In this fund Siddarth Chand Lall invests predominantly in smaller and medium-sized companies which he expects to grow dividends over time. These companies also offer the potential for attractive capital growth over the long term, though they are higher-risk than their larger counterparts.

We rate the Hargreave Hale fund management team - which acts as investment adviser to the Marlborough Multi-Cap Income Fund - highly. Since launching this fund in July 2011 it has performed exceptionally well and we remain positive on its long-term prospects, although there are no guarantees.

Charges

Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.80%
Ongoing saving from HL: 0.15%
Net ongoing charge: 0.65%

Key Investor Information Document

The charge to hold funds in the Vantage Service is 0.45%. Where savings are paid as loyalty bonus, they may be subject to tax in the Fund & Share Account. View our charges.

View factsheet Invest now

Natural yield

Withdrawing just the income generated by your investments leaves the underlying investments intact, improving the prospects for capital growth and a rising income over time, although both capital and income can fall as well as rise. Just taking the natural yield should mean your fund remains intact until your death. This may mean accepting a lower standard of living than your drawdown fund could have provided. Income is usually received in the form of dividends from shares, or interest paid by bonds, either held directly or via a fund. I prefer the latter as the direct approach often demands a great deal of time to be spent managing and reviewing the investments. A fund allows you to leave the day-to-day investment decisions to a professional fund manager.

Why equity income? When it comes to generating a natural yield, many clients choose equity income funds. An equity income fund will generally hold shares in businesses that are expected to grow their dividends over time. Many offer a starting yield of around 3% to 4% (variable and not guaranteed), whilst offering potential for capital and income to grow. The skill is in choosing businesses with the prospect of capital and dividend growth.

Consider also corporate bonds. Corporate bond prices have generally risen since the lows of 2008 and while the market has been volatile, those who kept their nerve have prospered. Bonds can also provide useful diversification to a share portfolio. That said, historically low interest rates have pushed bond prices up, and when interest rates start to rise again then bond prices will almost certainly fall. For exposure to this sector, we currently favour strategic bond funds, which seek to invest in different types of bonds from investment grade to high yield and government debt. These funds offer some of the benefits of a traditional corporate bond funds, but the broad investment remit should help shield investors from some of the worst of the falls. Like all investments however, values will still fall as well as rise and income will vary over time.

Drawing from capital

For some investors the natural yield won’t provide sufficient income, so capital withdrawals are necessary, which means you may need to sell investments to fund the required income.

However, there are inherent risks with this approach. Falling markets could be particularly damaging for those drawing from capital. The issue is selling investments to realise the withdrawal when prices are depressed. Selling after markets have fallen will significantly impair the portfolio’s ability to recover any loss. You are also depleting the pension by withdrawing from it which will quickly erode the value of the remaining capital. If adopting this strategy, it is important to keep a cash buffer for periods of market falls. To fully understand the risks of drawdown, you should request a copy of our guide, which contains a case study showing the effects of taking money out when the market is falling.

Request our free guide to drawdown

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Portfolio+

Drawdown is an option that requires you to make an active investment choice and review investments regularly. Portfolio+ is not specifically designed for drawdown. Nonetheless our Portfolio+ range is available for drawdown investors who believe it meets their individual requirements.

Continue to Portfolio+