Investment trusts could be a solution for those planning for retirement or if you’ve already retired and need dependable income. The way they’re structured removes some of the volatility associated with other investments.
Planning your finances in retirement could mean that you are able to live life to the full once you stop work.
Retirement is an exciting stage in your life. Many retirees have travel plans of other dreams that they want to live out when they are no longer tied to the nine-to-five. Ensuring that you have enough money to realise your dreams without running out of cash later on is a matter of sensible planning and understanding the choices that are available to you. Investment is often an important part of the process.
Retirement finance used to be simple. Unless you had a final-salary pension scheme, you used the money in your pension pot to buy an annuity, which then gave you a guaranteed monthly income for the rest of your life.
However, more recent rules on pensions allow you to leave retirement money invested then take it out as cash when you need it or pass it on tax-efficiently to the next generation.
With current low interest rates, many people at this stage in life choose to invest their money to secure the regular income they are unlikely to get from cash savings or to ensure that the money is growing for their descendants.
Investment trusts allow you to invest in a diversified portfolio of companies managed by an expert. They can provide a regular income, although this is not guaranteed and a diversified portfolio managed by an expert at a relatively low cost compared to many other collective (or pooled) investments.
Unlike unit trusts, investment trusts have a limited number of shares. A unit trust can expand infinitely depending on how many people invest in it.
Investment trusts are slightly different from other funds, so new investors need to understand a few things before jumping in.
Trusts are quoted on the stock exchange, so you buy and sell them just as you would any other share, and they can be held in tax-efficient wrappers such an Individual Savings Account (ISA). Tax benefits depend on your individual circumstances and tax allowances and rules may change.
The key to understanding trusts comes down to two different measures of value, the share price and the net asset value (NAV). The NAV is the value of the underlying investments that the trust has, divided by the number of shares. This figure can be higher or lower than the share price. If it is higher, then the trust is trading at a discount, meaning that the investments in the trust are worth more than the share price, and if it is lower, the trust trades at a premium.
Investment trusts have a secret weapon compared to other forms of investment. As well as paying out regular dividends, they are able to hold back some profits in the good times to pay out at more difficult times. This means they can increase their dividend payouts every year, even at times when the stock market performs less well. That’s particularly important for those relying on pension income, who may be particularly impacted by the ravages of inflation.
Investment companies can also store up to 15% of the income they receive each year. “Unlike open-ended funds, investment trusts have the ability to smooth dividend payments by utilising reserves to maintain or grow their annual dividends as required,” says Marrack Tonkin, head of investment trusts at BMO. “Shareholders could potentially obtain a more consistent income return from their investment.”