INvESTING
Investing For Income
PARTNERS IN MANAGING YOUR WEALTH
Contents 3 4 6 7 8 9 10 11 11
Introduction to Investing for income Bank deposits Investing in commercial property Fixed interest for secure income Equities for a rising income Risk and reward St. James’s Place income options Why St. James’s Place? What do I do next?
Introduction to investing for income Y
ou’ve worked hard for your money, but when the time comes to take things a bit easier you need your money to work hard for you. You want the capital you’ve saved and the income it provides to give you an enjoyable and comfortable retirement.
poses is that investors need to ensure their income and its spending power is maintained throughout their longer life. That means a rising income. Why is this important? In one word, inflation. Even at low levels, inflation is the biggest threat to your savings. A man retiring at 65 has a life expectancy of 21 years* but if during his retirement inflation averages just 4% a year, then the value of his money will halve in around 17 years.
You want it to give you the freedom to do what you’ve worked for. Where should you invest your money to give you the best chance of reaping the rewards and living the lifestyle you’ve earned? What factors should you consider? People are living longer and that means looking forward to a longer retirement. The problem this
Source: The Office for National Statistics and Government Actuary’s Department; 2006 principal life expectancy projections.
*
3 INVESTING FOR INCOME
Why not just invest in bank deposits? Bank deposits W
hile the money you hold in the bank or building society is secure and the bank is the ideal place for the money you need in the short term, the only return is the interest you receive on your
capital. This income fluctuates with interest rate movements and so in years of lower interest rates income from deposits will also be lower.
4 INVESTING FOR INCOME
Annual income from £100,000 investment in a Deposit Account (net of basic rate tax) £7,000 £6,000 £5,000 £4,000 £3,000 £2,000 £1,000 £0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Lipper Hindsight.
This shows that you may want to consider an alternative to deposits to provide you with the income you need to combat the effect of inflation. Keeping all of your money on deposit may lead to you dipping into your capital to supplement your income, running down your resources even faster.
16 years ago would now only be worth just over £6,538 in real terms. In other words, inflation would have reduced your spending power by almost a third. To combat the effects of inflation, it’s worth considering other types of investment which allow your capital to grow and provide an income that can maintain its spending power over the medium to long-term.
The chart below shows just how hard inflation can hit the real value of money. Assuming that you had spent the interest, £10,000 invested in a deposit account
But what are the alternatives?
The effect of inflation on a £10,000 investment since 1992 £10,000 £10,000 £6,538
£5,000
£0
1992
2008
Source: Lipper Hindsight.
5 INVESTING FOR INCOME
Investing in commercial property I
nvestment in a commercial property fund enables you to spread your investment across a portfolio of offices, retail outlets, warehouses and industrial premises.
property. Commercial property leases often have upward only rent reviews, providing the potential for growing income levels above deposit returns. Historically, property prices have often been shown to change independently of movements in fixed interest or equity markets.
It offers a real opportunity to achieve capital growth and a rising income to combat the effects of inflation, through a combination of rental income and any increase in property values, but without the risk of buying a single property and ‘having all your eggs in one basket.’ The chart below shows both the income and capital growth achieved through an investment in commercial
In other words, property investment has the potential to provide returns when other investment types may not be doing so - an important consideration when designing an income portfolio.
Income and capital growth achieved through an investment in commercial property 30%
Capital Growth
Income Return
25% 20% 15% 10% 5% 0% -5% -10% -15% -20%
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
-30%
1971
-25%
Source: IPD Index. Please be aware that past performance is not indicative of future performance. This information is provided for illustrative purposes only, you cannot invest directly into the IPD Index. Property can be difficult to sell - so you may not be able to sell/cash in the investment when you want to. The value of property is generally a matter of a valuer’s opinion rather than fact.
6 INVESTING FOR INCOME
Fixed interest for secure income F
ixed interest investments are also known as bonds or gilts - loans made by investors to companies or governments. There are three fixed components to the loan: the amount of interest paid as a percentage of capital invested, the dates the interest is paid and the term of the loan. At the end of the term, the investor’s capital is returned in full.
paid out to investors. Investment managers tend to run portfolios of bonds spread across a range of different borrowers, with a mix of high and low credit ratings to create a well-diversified investment with a balance of income and capital security. While fixed interest investments are often considered less volatile than equities, it is worth remembering that their value can go down from time to time and that inflation will still affect them, particularly the buying power of capital returned when the loan finishes.
The level of interest the investor receives depends on the creditworthiness of the borrowing company or government - the more risky the borrower is, (the more risk that they may default on either interest payments or capital repayment), the higher the interest
7 INVESTING FOR INCOME
Equities for a rising income E
quities, or shares, are investments in companies that may be listed on a stock exchange. The value of your shares fluctuates depending on the success of the companies in which you are invested and the value of your investment may go up and down in the short-term. However, history shows that, over the longer-term, share values generally increase, although of course, this can’t be guaranteed.
The chart below shows how, over the last 16 years, the income produced from a £100,000 investment in the FTSE All Share Index has gradually risen, while returns from cash deposits have generally gone down. Today, the income generated by an equity investment made in 1992 would be more than double that from deposits*. Of course, choosing the right companies to invest in is not easy, which is why many people leave this to professional fund managers.
As an investor, you are entitled to a share in the profits of that company by way of dividends paid to shareholders. Companies aim to deliver long-term success by way of sustainable dividend growth to reward shareholders, and this provides the potential for equities to deliver a rising income.
Annual income from £100,000 invested in a Deposit Account vs Equity Investment £9,000 FTSE All Share Income
£8,000
Deposit Income
£7,000 £6,000 £5,000 £4,000 £3,000 £2,000 £1,000 £0
1992
1993
1994
1995
1996
1997 1998
1999
2000
2001
2002 2003 2004 Deposit Income
2005
2007 2008 FTSE2006 All Share Income
* Source: Lipper Hindsight. Please be aware that past performance is not indicative of future performance. The value of your investment and the income from it can fall as well as rise. Returns on equities cannot be guaranteed. Equities do not provide the security of capital characteristic of a deposit with a bank or building society.
8 INVESTING FOR INCOME
Risk and reward I
Fixed Interest
t’s important to understand that investing in the types of assets that offer the opportunity to provide rising income and capital growth is more risky than leaving your money on deposit, so you need to invest carefully. You should consider avoiding the temptation to place all your eggs in one basket by having a spread of investments.
• • •
Bank/Cash Deposits • • • •
Offer investors security and instant access to their capital when required. Income from deposits will generally be dependent on the Bank of England Base Rate. Inflation will reduce the real value of deposits over the medium to long-term. No potential for capital growth.
Equities • • • •
Commercial Property • • • • •
Increased levels of income are achievable if investors are willing to take a risk with their capital. Most fixed interest investments offer little potential for income growth as the level of interest (known as the coupon) is fixed. The potential for capital growth is limited and investors should be aware that capital losses might occur, particularly in a period of volatile interest rates.
Unless investing through a collective investment vehicle, the minimum investment to access this asset class can be out of reach for many investors without taking on significant borrowing. Commercial property can offer investors higher levels of income than deposits and fixed interest investments. Rent reviews can provide the potential for income growth over the longer-term. When held over the medium to long-term, commercial property may also provide capital growth. The difficulties of buying and selling properties may mean that investors suffer a delay when trying to get their capital back.
Whilst in the short-term equities can be volatile, history shows us that they have outperformed all other asset classes over the long-term. Equities also offer the potential for a rising income over the medium to long-term. There is also the potential for significant capital gains. It is possible that the value of an investment in equities and the income from it can fall as well as rise.
By carefully combining these different asset types, you can create an investment that maximises your income possibilities, while controlling risk to your capital and providing the potential for inflation-beating returns that could well exceed those available on deposit. Given the variety of choice on offer, it makes sense to consider a more tailored approach to investing for income – one that’s designed to fit you and your profile.
9 INVESTING FOR INCOME
St. James’s Place income options S
Income Distribution Bond
t. James’s Place has a number of income options available across our range of products, which may be suitable for you. A few of the options open to you are summarised below.
Making use of the tax-deferred capital withdrawal facility under an Investment Bond offers investors a regular income from a range of high quality funds across a variety of asset classes. This option may interest clients looking to top-up their retirement income in a tax-efficient way.
Monthly Income Portfolio The Monthly Income Portfolio invests in four income Unit Trusts and provides investors with a regular monthly income. The funds chosen span equity, fixed interest and property investment and offer a well-diversified, actively managed portfolio.
The below portfolios are designed for clients wishing for income now or income later. Alternatively, clients can choose their own fund split.
Monthly Income Portfolio Fund Name
Investment Manager
UK High Income Unit Trust Corporate Bond Unit Trust Equity Income Unit Trust Property Unit Trust
Invesco Perpetual Invesco Perpetual Schroder Investment Management Invista Real Estate Investment Management
% Allocation 40% 30% 15% 15%
Income Distribution Bond Fund Name Equity Income Distribution Fund Income Distribution Fund Diversified Income Distribution Fund Corporate Bond Distribution Fund Property Distribution Fund Cautious Distribution Fund
Investment Manager Schroder Investment Management Invesco Perpetual AXA Framlington Invesco Perpetual Invista Real Estate Investment Management Jupiter Asset Management
10 INVESTING FOR INCOME
Income Now 10% 10% 20% 25% 25% 10%
Income Later 25% 25% 20% 10% 10% 10%
Why St. James’s Place? U
nlike most wealth managers, we don’t employ investment managers ourselves because we recognise that no single investment company has a monopoly on investment expertise. Instead, we carefully select highly respected external managers to run our funds. At the cornerstone of this approach, is the St. James’s Place Investment Committee which ‘manages the managers’ on behalf of our clients. With the help of
an independent consultancy firm, Stamford Associates, the Committee selects, monitors and, if necessary, changes the managers. Quite simply, this gives you unrivalled access to investment expertise and the opportunity to invest across a range of different investment firms, with the peace of mind of knowing that your money is being well looked after.
What do I do next? A
s an expert in wealth management, your St. James’s Place Partner can talk you through the options for investing in fixed interest, property and equities and create an income solution for you. If you are interested in discussing your income options in
more detail, contact your St. James’s Place Partner. Alternatively, for further information you can call St. James’s Place on 0800 0138 137 or visit www.sjp.co.uk.
Members of the St. James’s Place Wealth Management Group are authorised and regulated by the Financial Services Authority. The St. James’s Place Partnership and the title ‘Partner’ are the marketing terms used to describe St. James’s Place representatives. St. James’s Place UK plc: Registered Office St. James’s Place House, Dollar Street, Cirencester, Gloucestershire, GL7 2AQ, United Kingdom Registered in England Number 2628062
www.sjp.co.uk
SJP2302-VR11 (02/09)
PARTNERS IN MANAGING YOUR WEALTH
Contents 3 4 6 7 8 9 10 11 11
Introduction to Investing for income Bank deposits Investing in commercial property Fixed interest for secure income Equities for a rising income Risk and reward St. James’s Place income options Why St. James’s Place? What do I do next?
Introduction to investing for income Y
ou’ve worked hard for your money, but when the time comes to take things a bit easier you need your money to work hard for you. You want the capital you’ve saved and the income it provides to give you an enjoyable and comfortable retirement.
poses is that investors need to ensure their income and its spending power is maintained throughout their longer life. That means a rising income. Why is this important? In one word, inflation. Even at low levels, inflation is the biggest threat to your savings. A man retiring at 65 has a life expectancy of 21 years* but if during his retirement inflation averages just 4% a year, then the value of his money will halve in around 17 years.
You want it to give you the freedom to do what you’ve worked for. Where should you invest your money to give you the best chance of reaping the rewards and living the lifestyle you’ve earned? What factors should you consider? People are living longer and that means looking forward to a longer retirement. The problem this
Source: The Office for National Statistics and Government Actuary’s Department; 2006 principal life expectancy projections.
*
3 INVESTING FOR INCOME
Why not just invest in bank deposits? Bank deposits W
hile the money you hold in the bank or building society is secure and the bank is the ideal place for the money you need in the short term, the only return is the interest you receive on your
capital. This income fluctuates with interest rate movements and so in years of lower interest rates income from deposits will also be lower.
4 INVESTING FOR INCOME
Annual income from £100,000 investment in a Deposit Account (net of basic rate tax) £7,000 £6,000 £5,000 £4,000 £3,000 £2,000 £1,000 £0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Lipper Hindsight.
This shows that you may want to consider an alternative to deposits to provide you with the income you need to combat the effect of inflation. Keeping all of your money on deposit may lead to you dipping into your capital to supplement your income, running down your resources even faster.
16 years ago would now only be worth just over £6,538 in real terms. In other words, inflation would have reduced your spending power by almost a third. To combat the effects of inflation, it’s worth considering other types of investment which allow your capital to grow and provide an income that can maintain its spending power over the medium to long-term.
The chart below shows just how hard inflation can hit the real value of money. Assuming that you had spent the interest, £10,000 invested in a deposit account
But what are the alternatives?
The effect of inflation on a £10,000 investment since 1992 £10,000 £10,000 £6,538
£5,000
£0
1992
2008
Source: Lipper Hindsight.
5 INVESTING FOR INCOME
Investing in commercial property I
nvestment in a commercial property fund enables you to spread your investment across a portfolio of offices, retail outlets, warehouses and industrial premises.
property. Commercial property leases often have upward only rent reviews, providing the potential for growing income levels above deposit returns. Historically, property prices have often been shown to change independently of movements in fixed interest or equity markets.
It offers a real opportunity to achieve capital growth and a rising income to combat the effects of inflation, through a combination of rental income and any increase in property values, but without the risk of buying a single property and ‘having all your eggs in one basket.’ The chart below shows both the income and capital growth achieved through an investment in commercial
In other words, property investment has the potential to provide returns when other investment types may not be doing so - an important consideration when designing an income portfolio.
Income and capital growth achieved through an investment in commercial property 30%
Capital Growth
Income Return
25% 20% 15% 10% 5% 0% -5% -10% -15% -20%
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
-30%
1971
-25%
Source: IPD Index. Please be aware that past performance is not indicative of future performance. This information is provided for illustrative purposes only, you cannot invest directly into the IPD Index. Property can be difficult to sell - so you may not be able to sell/cash in the investment when you want to. The value of property is generally a matter of a valuer’s opinion rather than fact.
6 INVESTING FOR INCOME
Fixed interest for secure income F
ixed interest investments are also known as bonds or gilts - loans made by investors to companies or governments. There are three fixed components to the loan: the amount of interest paid as a percentage of capital invested, the dates the interest is paid and the term of the loan. At the end of the term, the investor’s capital is returned in full.
paid out to investors. Investment managers tend to run portfolios of bonds spread across a range of different borrowers, with a mix of high and low credit ratings to create a well-diversified investment with a balance of income and capital security. While fixed interest investments are often considered less volatile than equities, it is worth remembering that their value can go down from time to time and that inflation will still affect them, particularly the buying power of capital returned when the loan finishes.
The level of interest the investor receives depends on the creditworthiness of the borrowing company or government - the more risky the borrower is, (the more risk that they may default on either interest payments or capital repayment), the higher the interest
7 INVESTING FOR INCOME
Equities for a rising income E
quities, or shares, are investments in companies that may be listed on a stock exchange. The value of your shares fluctuates depending on the success of the companies in which you are invested and the value of your investment may go up and down in the short-term. However, history shows that, over the longer-term, share values generally increase, although of course, this can’t be guaranteed.
The chart below shows how, over the last 16 years, the income produced from a £100,000 investment in the FTSE All Share Index has gradually risen, while returns from cash deposits have generally gone down. Today, the income generated by an equity investment made in 1992 would be more than double that from deposits*. Of course, choosing the right companies to invest in is not easy, which is why many people leave this to professional fund managers.
As an investor, you are entitled to a share in the profits of that company by way of dividends paid to shareholders. Companies aim to deliver long-term success by way of sustainable dividend growth to reward shareholders, and this provides the potential for equities to deliver a rising income.
Annual income from £100,000 invested in a Deposit Account vs Equity Investment £9,000 FTSE All Share Income
£8,000
Deposit Income
£7,000 £6,000 £5,000 £4,000 £3,000 £2,000 £1,000 £0
1992
1993
1994
1995
1996
1997 1998
1999
2000
2001
2002 2003 2004 Deposit Income
2005
2007 2008 FTSE2006 All Share Income
* Source: Lipper Hindsight. Please be aware that past performance is not indicative of future performance. The value of your investment and the income from it can fall as well as rise. Returns on equities cannot be guaranteed. Equities do not provide the security of capital characteristic of a deposit with a bank or building society.
8 INVESTING FOR INCOME
Risk and reward I
Fixed Interest
t’s important to understand that investing in the types of assets that offer the opportunity to provide rising income and capital growth is more risky than leaving your money on deposit, so you need to invest carefully. You should consider avoiding the temptation to place all your eggs in one basket by having a spread of investments.
• • •
Bank/Cash Deposits • • • •
Offer investors security and instant access to their capital when required. Income from deposits will generally be dependent on the Bank of England Base Rate. Inflation will reduce the real value of deposits over the medium to long-term. No potential for capital growth.
Equities • • • •
Commercial Property • • • • •
Increased levels of income are achievable if investors are willing to take a risk with their capital. Most fixed interest investments offer little potential for income growth as the level of interest (known as the coupon) is fixed. The potential for capital growth is limited and investors should be aware that capital losses might occur, particularly in a period of volatile interest rates.
Unless investing through a collective investment vehicle, the minimum investment to access this asset class can be out of reach for many investors without taking on significant borrowing. Commercial property can offer investors higher levels of income than deposits and fixed interest investments. Rent reviews can provide the potential for income growth over the longer-term. When held over the medium to long-term, commercial property may also provide capital growth. The difficulties of buying and selling properties may mean that investors suffer a delay when trying to get their capital back.
Whilst in the short-term equities can be volatile, history shows us that they have outperformed all other asset classes over the long-term. Equities also offer the potential for a rising income over the medium to long-term. There is also the potential for significant capital gains. It is possible that the value of an investment in equities and the income from it can fall as well as rise.
By carefully combining these different asset types, you can create an investment that maximises your income possibilities, while controlling risk to your capital and providing the potential for inflation-beating returns that could well exceed those available on deposit. Given the variety of choice on offer, it makes sense to consider a more tailored approach to investing for income – one that’s designed to fit you and your profile.
9 INVESTING FOR INCOME
St. James’s Place income options S
Income Distribution Bond
t. James’s Place has a number of income options available across our range of products, which may be suitable for you. A few of the options open to you are summarised below.
Making use of the tax-deferred capital withdrawal facility under an Investment Bond offers investors a regular income from a range of high quality funds across a variety of asset classes. This option may interest clients looking to top-up their retirement income in a tax-efficient way.
Monthly Income Portfolio The Monthly Income Portfolio invests in four income Unit Trusts and provides investors with a regular monthly income. The funds chosen span equity, fixed interest and property investment and offer a well-diversified, actively managed portfolio.
The below portfolios are designed for clients wishing for income now or income later. Alternatively, clients can choose their own fund split.
Monthly Income Portfolio Fund Name
Investment Manager
UK High Income Unit Trust Corporate Bond Unit Trust Equity Income Unit Trust Property Unit Trust
Invesco Perpetual Invesco Perpetual Schroder Investment Management Invista Real Estate Investment Management
% Allocation 40% 30% 15% 15%
Income Distribution Bond Fund Name Equity Income Distribution Fund Income Distribution Fund Diversified Income Distribution Fund Corporate Bond Distribution Fund Property Distribution Fund Cautious Distribution Fund
Investment Manager Schroder Investment Management Invesco Perpetual AXA Framlington Invesco Perpetual Invista Real Estate Investment Management Jupiter Asset Management
10 INVESTING FOR INCOME
Income Now 10% 10% 20% 25% 25% 10%
Income Later 25% 25% 20% 10% 10% 10%
Why St. James’s Place? U
nlike most wealth managers, we don’t employ investment managers ourselves because we recognise that no single investment company has a monopoly on investment expertise. Instead, we carefully select highly respected external managers to run our funds. At the cornerstone of this approach, is the St. James’s Place Investment Committee which ‘manages the managers’ on behalf of our clients. With the help of
an independent consultancy firm, Stamford Associates, the Committee selects, monitors and, if necessary, changes the managers. Quite simply, this gives you unrivalled access to investment expertise and the opportunity to invest across a range of different investment firms, with the peace of mind of knowing that your money is being well looked after.
What do I do next? A
s an expert in wealth management, your St. James’s Place Partner can talk you through the options for investing in fixed interest, property and equities and create an income solution for you. If you are interested in discussing your income options in
more detail, contact your St. James’s Place Partner. Alternatively, for further information you can call St. James’s Place on 0800 0138 137 or visit www.sjp.co.uk.
Members of the St. James’s Place Wealth Management Group are authorised and regulated by the Financial Services Authority. The St. James’s Place Partnership and the title ‘Partner’ are the marketing terms used to describe St. James’s Place representatives. St. James’s Place UK plc: Registered Office St. James’s Place House, Dollar Street, Cirencester, Gloucestershire, GL7 2AQ, United Kingdom Registered in England Number 2628062
www.sjp.co.uk
SJP2302-VR11 (02/09)
