Retirement income planning firm Chancery Lane has called the industry to redefine the meaning of risk in retirement investing.
In its latest white paper, Chancery Lane argues for an income investment strategy as opposed to a capital gains strategy related to retirement planning.
The paper warns that the “stubborn conflation” of income and capital returns is a “major stumbling block” to delivering income to pay for monthly living expenses.
It argues that income stability of an asset matters more than its capital value or share price if the aim is to ensure retirees receive an income each month via reliable investments.
Chancery Lane chief executive Doug Brodie said: “Having had institutional risk descriptors as the backbone of the definition of ‘retail investor risk’ for so long, we should not miss out an interactive discussion between adviser and investor about risk to income, risk to capital and emotional decisions and timescales.
“The simplicity of the natural income approach is more predictable, more valuable and – ultimately – more reassuring for investors, particularly those who are retired.
“It meets what is required by most pension drawdown investors – an income for life, rising each year to counter inflation, with a good degree of certainty, whilst retaining some or all capital to be passed on as required.”
According to data from Chancery Lane, there was no correlation between income and capital over the past 33 months.
Of the major investment trusts tracked by Chancery Lane, the income payment record remained at 100%. Only one of them made a reduction, in 2020.
In contrast, the FTSE All Share index has fallen 16 times since January 2020, or 48% of the time. Chancery Lane stated that passive index investing is a “stressful and unreliable” method of creating income.
For the bond market, Chancery Lane used the M&G Corporate Bond fund as a proxy. It also fell in 16 of the 33 months.
Brodie added: “Even over this period of lively investment volatility, investment trust dividends were constant, and outperformed income via total return of both low-cost passive trackers and the traditional 60/40 portfolio.
“This is because they have a rare ability to support dividend payments as balance sheet reserves, which is one good option for providing a stable income to those who have waved a fond farewell to their former stable income – a monthly salary.”
In last year’s white paper, Chancery Lane looked into how to allocate assets within a portfolio to generate incomes.
It found that an equity-based investment is often the safest solution to achieve this goal.
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