What's the best way to invest your SIPP for retirement income?
Written by Boring Money
16 July, 1970
Retirement today is rarely a single cliff-edge at 60 - most people phase out of work gradually, which means a Self-Invested Personal Pension (SIPP) built for growth needs to shift toward generating income. The right mix of bonds, multi-asset funds and dividend-paying equities depends on how much other income you already have (state pension, annuities, rental income) versus how reliant you are on your pot alone.
Why do I need to switch from growth to income when I retire?
Retirement now happens gradually, not overnight – so your (SIPP) must shift from growth to income at some point. Fast-growing tech stocks work early on but won't fund reliable monthly withdrawals later. The right balance of equities, bonds and specialist assets depends on your other income: more elsewhere means room for growth; less means you need stability.
Retirement is an altogether different proposition today than for previous generations. Most retirees aren’t dancing off into the sunset with a gold watch at 60, but are increasingly taking a phased and flexible approach to stopping work. That means that at some point, many will need to generate an income from the holdings in your SIPP.
For many investors this requires a change of approach from the focus on capital growth that has characterised their investment priorities to date. A bunch of fast-growing technology stocks may be perfect for phase one, but they probably aren’t going to do what is needed in phase two.
Building a sustainable income in retirement is becoming more challenging. While higher interest rates may have improved cash returns, inflation remains a long-term threat to your spending power. This makes equities, bonds and specialist asset classes an important source of both income (and capital growth) to maintain a healthy pot through your retirement path.
The balance between these various assets class will depend on your priorities for income generation versus long-term capital growth. If you have annuities, some salary still coming in, or income from a buy to let, for example, you may be able to lean towards capital growth and a lower income, but if you depend on your income to live, you may need to find high and stable sources of income.
What's the best option for steady retirement income?
Bond markets are the best starting point for steady income. Individual bonds pay a set amount and return your capital at a fixed date, while corporate bond funds like Premier Miton Corporate Bond Monthly Income offer defensive, diversified monthly payouts, they're less suited to investors who also need their capital to grow.
If steady and predictable income is your priority, your best starting point is the bond markets. Individual bonds give you a set income, over a specific period of time and your money back at the end. Government or corporate bond funds are generally good for generating a steady income, but less good for those who need their capital to grow over time.
Richard Carter, head of fixed interest research at Quilter Cheviot, likes the Premier Miton Corporate Bond Monthly Income fund:
It is a good fixed income option for investors looking for a more defensive and diversified source of returns to equities. The fund has been well-managed over the long-term by Lloyd Harris and Simon Prior, giving good stability to the fund and its investment philosophy. The portfolio features mostly investment grade corporate bonds and tends to have a bias to holdings from financial institutions.
Changes in interest rates
and inflation expectations can create volatility in bond markets, so it is also useful that the Premier Miton fund has a lower duration compared to its benchmark index. That means it has lower sensitivity to changes in interest rates. As the name suggests, income is paid monthly, which can be helpful for those getting used to living without a regular salary.Are there more flexible bond options for retirement income?
"Unconstrained" bond funds like TwentyFour Strategic Income are the flexible option - they aren't tied to a benchmark and can search globally for opportunities across government bonds, corporate debt and securitised assets. It currently yields around 6%, though carries higher credit risk. For a blended approach, multi-asset funds like Jupiter Merlin Income combine equity, bond and specialist income strategies in one portfolio.
Carter also likes the TwentyFour Strategic Income fund. This is an “unconstrained” bond fund, which means that it doesn’t follow any particular benchmark and can scour global fixed income markets for the best opportunities. It invests in government bonds
, corporate debt and securitised assets.It is run by TwentyFour's well-resourced bond team and currently yields around 6%, while also hunting out opportunity for capital growth. The fund does tend to have relatively high levels of credit risk, so investors should be aware of that, but the team will also hold significant amounts of government bonds at certain points in the investment cycle to help manage that risk and has actually been reducing risk modestly over recent months.
A halfway house might be an income-focused multi-asset fund
. McDermott likes the Jupiter Merlin Income fund:It takes a different approach. As a multi-manager fund, it blends carefully selected equity income, bond and specialist income strategies into a single portfolio. Jupiter Merlin team's asset allocation expertise, with diversification across managers and asset classes, helps to smooth returns while maintaining a dependable income stream.
Why does income growth matter more than the starting yield?
A lower starting yield can still win long-term if it grows: rising dividends protect your income from inflation better than a high yield that stays flat. Funds like Man Income and Schroder Global Equity Income are built around this principle, prioritising companies with sustainable, growing payouts over the highest headline yield.
Income growth is often an under-rated attribute for investors. While the starting yield
may be lower, it can be an important way to protect your income from the ravages of inflation over time. Company dividends have tended to keep pace with inflation and many equity income fund managers will prioritise companies that can grow their dividends over time.A good place to start is the Association of Investment Companies ‘Dividend Heroes’ list [1]. These are investment trusts that have grown their payouts to shareholders for 20 or more years consecutively. It includes City of London investment trust (60 years and counting), plus Alliance Witan, The Global Smaller Companies trust and F&C Investment trust. There are a range of UK and global options, large or small cap focused.
For open-ended funds, McDermott likes Aegon Global Equity Income:
Rather than chasing the highest-yielding shares, the managers focus on high-quality companies with resilient cash flows and sustainable dividends, aiming to deliver an attractive and growing income alongside long-term capital appreciation.
He also backs JPM US Equity Income fund, believing it offers a useful counterbalance to the concentration risk many investors face through passive US funds. Even after the recent wobble, many of these are still dominated by mega-cap technology stocks.
Paul Angell, head of investment research at AJ Bell, picks Man Income, which is “proof that income funds can deliver strong returns for investors beyond a regular stream of cash in their pocket.” He points out that including both dividends and capital growth, the fund has returned 186% over the past 10 years, making it the third best performing UK open-ended fund of any type, including non-income focused ones.
That level of performance would have turned £1,000 into £2,860, excluding investment platform charges. Man Income yields 4.3%, greater than the 3.3% offered by the FTSE 100 index, and it focuses on companies it considers to be undervalued. A focus on financial strength and cash flow helps to avoid weak companies that are cheap for a reason and helps to find more robust ones. Its process clearly works given the decent track record but just remember there is no guarantee it will always do well.
He also likes Schroder Global Equity Income, which yields 3.2% and aims to deliver income and capital growth ahead of the MSCI World Index
. It focuses on companies it believes are undervalued and have sustainable dividends.The strategy benefits from a disciplined and well-articulated investment process that has been in place for many years. However, the team takes positions that are very different to the benchmark, so the fund could be volatile over short periods. A 160% total return over 10 years shows the power of being patient, turning £1,000 into £2,600 excluding investment platform charges.
McDermott says successful retirement income is about far more than maximising yield:
Combining quality companies, global diversification, active asset allocation and evolving portfolio construction can help create an income stream that is resilient enough to support the long path through retirement.
---
Post a comment:
This is an open discussion and does not represent the views of Boring Money. We want our communities to be welcoming and helpful. Spam, personal attacks and offensive language will not be tolerated. Posts may be deleted and repeat offenders blocked at our discretion.
