Is there a robo adviser who provides both income and growth for those who are retired?
By Mike Narouei, Content Producer at Boring Money
24 April, 2018
It seems to me that at the moment all the Robos focus on long term growth and reinvesting dividends - which is fine if you are younger. Have I got this right?
Reinvesting is a good idea if you're younger, but approaching retirement changes things. Holly gives our user Paul the details.
Is there a robo investor who provides both income and growth for those who are retired? There must be a large market for this. It seems to me at the moment that all robos focus on long term growth and reinvesting dividends, which is fine if you are younger. Have I got this right? Any comments/thoughts?
The reinvestment approach has some advantages. Income generating assets have become very expensive in recent years and casting your investment net a little wider can give you a better result in the longer-term. There may also be tax advantages – if you can use your capital gains tax allowance alongside the usual income tax allowances that puts far more outside the tax net. (The exact details would need to be discussed with an adviser).
However, a lot of the robo advisers are targeted at those still in the accumulation phase. They assume that those people won’t be taking an income from their investments just yet. As such, while there are ways you can do it, they may not be flexible enough for your needs.
Platforms may be marginally more expensive, but they offer a far broader investment choice and sound like they may be more suitable for your needs. Our online investments guide (https://www.boringmoney.co.uk/learn/articles/robo-adviser-for-income-and-growth/#) can help you choose the best one. They will all offer drawdown and in practice, won’t look significantly different to a robo adviser. Many have advisers on the end of a telephone line to help.
A note on reinvesting dividends:
It is far better when you are building a pot to reinvest your dividends. The following example is shamelessly stolen from Hargreaves Lansdown – the original is here – but I think it illustrates the point very well.
- "Two investors each hold £100 worth of shares in the fictitious company Rice & Co., paying a 5% dividend. Assuming the shares do not change in value, after five years Investor A, who has chosen to take the income, will have received £25 of income and still have their £100 original shareholding, for a total return of £125. However, Investor B who has reinvested their income, will have £127.63."
As those shares are held for longer, this difference becomes more acute - after 40 years the total value of investor A’s shareholding plus all the income received is less than half that of Investor B’s shareholding.
This is even more pronounced in real life because the stock market has grown considerably over the last thirty years. According to HL’s figures - £10,000 invested in the FTSE 100 30 years ago would have been worth £31,225 at the end of July 2017 if dividends had been taken as income. Had they been reinvested it would have been worth £96,569.
However, the point is, after a certain age you don’t necessarily want or need your pot to grow. You might like it to keep pace with inflation, but getting the largest possible pot isn’t the target anymore. This is particularly true if you are constrained by the lifetime allowance (https://www.boringmoney.co.uk/learn/articles/the-lifetime-allowance/), or your heirs might face a significant inheritance tax bill.
At this point you will need to look at how you take an income. You can either look at moving into assets that generate an income – such as shares that pay dividends (in practice, you may hold some of these anyway) or bonds. The alternative is to sell little chunks of your portfolio to generate an income. Either approach, done well, has its merits.