The favourite funds of people living off their investments in retirement have delivered handsomely over the past few years, new research shows.
A saver who put a £100,000 pension pot into the best-selling Fundsmith Equity in spring 2015 would be sitting on £165,100 now - even if they had made withdrawals of £5,000 a year.
The 10 most popular investment funds with people using income drawdown to fund retirement are revealed by AJ Bell, which analysed how its top-sellers have performed since pension freedom reforms four years ago.
What are the best-selling funds among retirees? Find the top 10 below
Pension freedom: A saver can now keep their pot invested and draw an income from it , rather than buy an annuity providing a guaranteed income for life
The worst performer in the top 10, City of London investment trust, would now be worth £96,170 if £5,000 a year had been withdrawn, some 42 per cent less than with Fundsmith Equity.
However, City of London produced the second highest amount of dividends in the top 10 at £16,830, which pensioners could have withdrawn as 'natural income' without having to sell any investments.
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The pension freedom reforms launched in 2015 mean a saver can now keep their pot invested and draw an income from it, rather than buy an annuity which provides a guaranteed income for life.
Tom Selby, senior analyst at AJ Bell, says some retirees in income drawdown schemes are focusing on capital growth, which means their yield is lower and they have to sell investments to generate income, but this approach works fine if their funds are doing well.
However, he points out that investors focusing on income with an investment trust like City of London won't have been too unhappy with getting nearly £17,000 of natural income, which is a decent sustainable return, while their capital hasn't eroded much.
'The good news is that so far, pension freedom investors have benefited from strong stock market returns and even better active fund selection, in most cases generating a golden combination of income and capital preservation.'
Selby says the research shows that investment trusts - listed companies with shares that trade on the stock market - are popular with pension freedom investors, accounting for six of the top ten most purchased funds, and delivering for income seekers.
Best-selling funds among retirees
Numbercrunching: Top 10 most purchased funds by income drawdown investors via AJ Bell. Investment performance data from FE analytics 6/4/2015 – 28/3/2019. *5% of opening fund value, taken quarterly
Top sellers and their 'natural' income
Dividend yield: Top 10 most purchased funds by income drawdown investors via AJ Bell. Investment performance data from FE analytics 6/4/2015 – 28/3/2019.
The latest 'dividend heroes' list highlighted investment trusts with at least a 20-year history of consecutive payment increases. It showed four investment trusts have now raised their payouts for 50 years in a row.
But Selby adds: 'Investment trusts can deliver great total returns too. The most popular trust – and second most popular collective investment pick overall – wasScottish Mortgage, which has turned £100,000 into £161,110 over the past four years, even with £5,000 withdrawn each year.'
AJ Bell worked out that someone who had split a £100,000 income drawdown portfolio equally across the top 10 best selling funds and taken out £5,000 a year would have been left with a portfolio worth £122,910, almost 23 per cent higher than in spring 2015.
How to rescue your retirement portfolio from losses
People who take an income while markets crash will crystallise their losses and pile up problems for the future.
This is especially dangerous during the crucial early years, since it can do irrecoverable damage to your portfolio.
We explain how to avoid the nasty trap of 'pound cost ravaging' here.
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However, stock markets have performed strongly over the past four years, and Selby warns that investors should not expect this trend to continue over a retirement that could last 30-35 years.
'Investors should not be lured into a false sense of security,' he says. 'Even star fund managers can suffer.
'History has shown us that, at some point or another, stock markets are almost certain to blow up, and anyone who enters drawdown and takes big withdrawals at just the wrong time could severely damage their long-term prospects.
'In other words, don’t assume the experience of the last four years will be repeated in the next four years.'
How many funds should you invest in?
In reality, investors wouldn't invest a £100,00 pension pot in just one fund on the AJ Bell list of top sellers. It has no broad-based, multi-asset contenders of the kind people buy as 'one stop shop' investments.
Pension freedoms have seen many older people taking active control of their retirement investments for the first time, and many find choosing just one fund a tempting idea.
There are plenty of investment firms touting funds to accommodate them. 'Multi-asset' funds hold shares, bonds and other investments, are well diversified, and avoid anything too exotic that could suddenly skew performance.
However, investing in just one fund contradicts an important tenet of investing, that you shouldn't put all your eggs in one basket.
Planning for your retirement?
Should you pay for financial advice or do it yourself?We take a look here.
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When we asked finance experts the number of funds investors should ideally hold in their portfolios, they told us rookies can start out with one but aim for 10 to 16, and 20 tops.
Selby says: 'Anyone considering how to invest their money in retirement needs to consider a number of things, including whether they want to prioritise income or capital growth (or both) and how much risk they want to take.
'It is usually sensible to have somewhere in the region of 5–10 different funds in your portfolio.
'This should ensure you aren’t overly exposed to one particular country or sector while avoiding unnecessary complexity and "doubling up" on stocks held by different fund managers.
'The key is to know how your money is invested (including costs and charges) and spread your risks as widely as possible.
'Some may prefer to have more holdings than this, although consideration needs to be given both to trading costs and the time it will take to monitor such a large number of investments.
'There are a wide variety of "ready-made" investments available for investors who would rather not do all the fund selection themselves.'
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