Criteria for selecting Income funds

4500_Donavan

Hi,
What criteria do you use for selecting Income funds for your SIPP? I'm thinking about diverting part of my future contributions to this type of fund for the next few years to build up a cash fund to protect me from SORR. I have 5 to 8 years to go before finishing accumulation phase.
Many thanks. 

Marcon

What's your attitude to risk?

4500_Donavan

Marcon said:

What's your attitude to risk?

Hi. I'm more interested in what other people have done including their reasoning/attitude to risk.
Thanks.

dunstonh

What criteria do you use for selecting Income funds for your SIPP? 

What do you mean by income funds?
Do you mean income units instead of accumulation units?
Or high yielding funds that focus income distributions?
or fixed income securities (such as bonds)?

DRS1

Some interesting possibilities and comments on here
Basket of ITs — MoneySavingExpert Forum

As a general principle people tend to switch to income funds when they are taking an income - less so when in the accumulation phase.

You may be looking for defensive investments and I guess you would find some of them in the sort of ITs mentioned in that thread.

Bostonerimus1

4500_Donavan said:

Hi,
What criteria do you use for selecting Income funds for your SIPP? I'm thinking about diverting part of my future contributions to this type of fund for the next few years to build up a cash fund to protect me from SORR. I have 5 to 8 years to go before finishing accumulation phase.
Many thanks. 

What do you mean by income funds? There are ITs (closed end funds) that provide regular dividends, but there are also open ended funds that concentrate on dividend companies or bonds or a combination of the two. Are you really asking how to "de-risk" your investments in preparation for the drawdown phase? Generation of retirement income is probably the trickiest financial puzzle most people will ever face as the solution can contain products ranging from insurance contracts (annuities) up to growth oriented stocks and funds.

Linton

I have a large income portfolio which provides about 25% of current income. My main criteria for chosing a new income fund:

1) Demonstrably steady or rising dividends/interest in £ terms over the past few years equivalent to  > 5% and <8% of current price.
2) Increase diversification of the current portfolio in terms of type of investment (equity, bonds, infrastructure, loans etc), nationality and sector allocation (equity).
3) No unexpected long term fall in capital value.  Bond funds fell significantly in value in the past few years due to increased interest rates, but this was expected.

Bostonerimus1

Linton said:

I have a large income portfolio which provides about 25% of current income. My main criteria for chosing a new income fund:

1) Demonstrably steady or rising dividends/interest in £ terms over the past few years equivalent to  > 5% and <8% of current price.
2) Increase diversification of the current portfolio in terms of type of investment (equity, bonds, infrastructure, loans etc), nationality and sector allocation (equity).
3) No unexpected long term fall in capital value.  Bond funds fell significantly in value in the past few years due to increased interest rates, but this was expected.

Looking at my portfolio I suppose I have two small holdings that could legitimately be called "income products" and maybe they will serve as examples of some options available to the OP.

1) I have a fixed lifetime annuity with an insurance company which will produce a guaranteed income for the rest of my life.

2) I have an income fund that is 60% bonds and 40% dividend stocks with a current dividend of 4% and an average annual return of 9% since it began in 1970. I use it because of the long term track record and the average duration of the bonds is 6.5 years making it not too sensitive to interest rates.

kempiejon

4500_Donavan said:

Hi,
What criteria do you use for selecting Income funds for your SIPP? I'm thinking about diverting part of my future contributions to this type of fund for the next few years to build up a cash fund to protect me from SORR. I have 5 to 8 years to go before finishing accumulation phase.
Many thanks. 

For SORR I have preferred a gilt ladder and premium bonds and if you are 5 to 8 years away from needing to take an income perhaps that's an alternative, just start accumulating some cash. To my taste it's a bit too early but we all see risk and volatility differently.

I have invested for income in shares but funds with an income bias might well forgo growth and slow your path to finishing that accumulation phase. I have some of the vanguard global income ETF VHYL but it only yields 3% and has lagged the vanguard global ETF VWRL and the developed world version VEVE in total return over the 10 years I've held.

4500_Donavan

Thanks for all the comments. I have a bucket of 100% equity. Split between Tech funds (active and tracker) and World Equity trackers. I was going to leave those alone and want to build a couple of other buckets to reduce SORR at point of retirement and drawdown. I was thinking about gilt ladders and IT or funds that generate income to feed gilt ladders, etc.

Bostonerimus1

Your first bucket should probably be a couple of years of spending in a saving account or money market to cover emergencies. Then decide on how long you want the bond ladder to last, how much you want to put in and how much income you are looking to generate each year. The latter will depend on the gilt yields and how much you put into each rung of the ladder.