A look at how you might earn an income from your savings and the funds that offer a potentially stronger return.

Up until a few years ago, many people – especially those approaching retirement – assumed that they’d be able to use their savings to supplement their income. Yet with interest rates having fallen to record low levels, this is far less likely to be the case. So what can you do instead?

For many people, the answer lies in getting their savings to work harder through investing. Whilst it is more common for investors to target growth on their money, there are also a wide range of income-producing investment funds, which can offer the potential for stronger returns.

These types of funds are more focused on generating an income stream to investors, rather than delivering growth. This might be achieved in different ways, such as investing into companies that pay attractive dividends. If your priority for investing is to generate an income stream that can pay the bills or improve your lifestyle – rather than growing your wealth – and you are prepared to accept some form of risk, it’s worth considering income-producing funds as an alternative way of potentially achieving more rewarding returns.

Like with any type of investing, you need to have the capital and the commitment to put it to use for a number of years. This means having alternative pots of money in savings accounts for shortterm or emergency requirements, such as a surprisingly large bill.

A great advantage of an income-producing fund, compared to a growth investment, is you are receiving regular returns vary, it shouldn’t be something to wholly rely on for your absolute day-to-day essentials (like your bills or the weekly food shop), but it can help you to afford treats and luxuries like going on holiday
or buying a new car.

The benefits of a balanced portfolio

There are different types of income funds available, with some involving your capital being invested solely into one asset class. You can benefit to a greater extent from this asset class performing well, but are more exposed during periods where this asset class is under-performing.

Alternatively, a multi-asset investment fund could prove a more rewarding way of achieving your desired level of income. This is where your money is invested into a range of asset classes – such as equities, gilts, bonds, cash and property – and an expert fund manager actively makes day-to-day decisions on your behalf over which holdings to buy, retain or sell.

A multi-asset fund can invest in, for example, 300 underlying stocks, meaning your investment risk is spread over many assets. So if one area of the portfolio is under-performing, another may still be delivering positive levels of income to boost overall performance although this is not guaranteed and the value of the overall investment may fall as well as rise and you may not get back the full amount invested.

Whilst it is more common for investors to target growth on their money, there are also a wide range of income-producing investment funds, which can offer the potential for stronger returns.

Boosting your retirement

The 2015 pension freedoms have significantly boosted the popularity of income funds. Providing you have a defined
contribution pension, you can now access your full pot from the age of 55 – and use it however you wish. Previously, most people had to use at least 75% to arrange a retirement income, which for
many meant purchasing an annuity.

Yet without such a restriction – and with annuity rates having fallen significantly – many people who have acted on the pension freedoms have chosen to invest their pot into an income producing fund, to use as an income in retirement.

Income-producing funds are risky and complex, so you should always seek financial advice before selecting one. That way you can benefit from an expert finding suitable options with your personal circumstances, and offering recommendations you’ll feel comfortable considering.

Investments do not include the same security of capital which is afforded with deposits/savings
accounts.
The value of investment may go down as well as up and you may not get back the full amount
invested.