Income funds a way out of pensioner’s plight – BJM

Pensioners hurt by chronically low interest rates can ease the pain by moving from money market funds to income funds, says BJM Wealth, the financial planning and wealth management arm of BJM Private Clients.

The firm specialises in financial services for high net worth individuals and has been advising clients for some time of the yield curve advantages of income fund exposure in a low interest rate environment.

Tony Barrett, CEO of BJM Wealth, says the expectation is that rates will remain low for some months and could even go lower and pensioners that have tried to sit out the rate slump are taking strain.

“It’s time for pensioners in this situation to consider a change of strategy,” he notes. “Two years ago, a risk-averse investor looking at fixed-interest options could simply pump cash into money market funds and receive a 13% return. After successive rate cuts, the return is down to 6% and closer to 4% net of tax.

“For less well-off pensioners this can mean real distress.”

The BJM wealth specialist says money market funds remain an ideal “parking place for cash” when the investment horizon is three months or less. If investors can do without the cash for longer, even if it’s just six months to a year, better returns can be achieved from a good income fund option at only marginally more risk.

This type of product employs a mix of corporate and government bonds, preference shares, other fixed-interest products, property and cash.

Barrett points out that at least one highly regarded income fund showed an annual return of 8.9% at a time when money market funds were averaging in the region of 6.5%. At BJM we believe that this kind of yield pick-up will continue for some time to come.

“The difference is significant for pensioners and others that depend on returns from interest-linked products,” says Barrett.

“Historically, the best long-term returns are achieved by equities, but volatility has been high. Many conservative investors and older people are therefore a little nervous at the moment.

“The tragedy for some older people is that they don’t need ready access to all of their cash. It is possible for a portion to be committed into income-type funds, thereby earning a better return and cushioning some of the financial pressure they are under.

“The right advice at the right time could have made a material difference to their lives.”

· BJM points out that investment needs and profiles vary from case to case and that professional advice from qualified financial planners should be sought whenever possible.