The best funds for your pension

Nick Sudbury explores some of the best ways to invest for retirement using funds and trusts within your pension portfolio.

A pension is by far and away the most tax efficient way of saving for your retirement, but unless you are lucky enough to have a defined benefit scheme, the final income will depend on how much you contribute and the performance of the investments that you hold within it. This is particularly the case if you are one of the growing number of retirees who opt to take their benefits via income drawdown rather than as an annuity. 

Before the introduction of pension freedoms in April 2015, most people used the money in their retirement fund to buy a fixed or inflation-linked income for the rest of their life. Annuities offer security of income, yet the rates have plummeted in line with gilt yields to the extent that a £100,000 fund would only buy a 65-year old a fixed annual income of £4,654.

Annuity rates are now 14% lower than at the start of the year and are close to their all-time lows. Fears of a no-deal Brexit and a slowdown in the global economy have increased the cost of buying the secure investments that insurers use to underpin the monthly payments.

The low rates have put many people off, which is why a growing number have opted for the more flexible alternative of income drawdown. This enables them to withdraw up to a quarter of their fund tax-free with the remainder staying invested, from which they can take an income.

In the second quarter of 2019, a record 336,000 people withdrew money from their pensions in this way, with the average amount taken out per person being £8,200 for the three-month period. In total, over £28bn has been flexibly withdrawn from pensions since the changes were introduced in 2015. 

Pension portfolio

How you invest your pension fund will depend on what other savings and financial commitments you have, your risk appetite and how long you have to go until retirement.

When you start saving you will be in the accumulation phase where you are able to top up your investments using your regular pension contributions. Gradually, however, you will start to move to a position where you need to rely on the money you have built up for your retirement and all of your spending.


Adrian Lowcock, head of personal investing at Willis Owen, says that this is a big shift and has a huge impact on investing:

“The inability to add extra money when markets or an investment falls means that the volatility is much more important; every fall in value is likely to be keenly felt as it can impact the long-term income you get from your investments. Capital preservation is therefore absolutely critical the closer you get to retirement.”

The other key factor is the impact of inflation, as this will affect your standard of living. It is now perfectly possible to be retired for more than 30 years, in which case even low inflation would halve your spending power −hence the need for your investments to achieve capital growth and a rising level of income.

Just starting out

For someone who is just starting a pension in their twenties, retirement may seem like a long way off, but the sooner they start saving, the easier it will be to provide themselves with a more comfortable lifestyle once they stop working.

Patrick Connolly, a chartered financial planner at independent financial planners, Chase de Vere,  says that if they’re prepared to accept the risks,  younger people can take a fairly aggressive approach to their investments:

“This means holding most or all of their money in equity funds, as they will be investing for a long time and so are able to ride out any market volatility.”

Young people in this age group who are making regular payments into their pension, will find this helps to negate the risks of market timing over the long term. Adding to holdings on a monthly basis enables them to benefit from pound-cost averaging, with the normal price fluctuations being evened out by the slow drip feeding of new money into the market.

It is also important to appreciate the significant impact of fund charges on the potential returns when investing over such a long timeframe.For example, a monthly investment of £500 for 30 years into a fund that grows at seven percent per annum with an annual fee of one percent would produce a lump sum of £484,000. If the fee was 0.1%, which is more akin to a passively managed tracker fund, the final figure would be £577,000, assuming it can generate the same high return.

Funds to get underway

 For a pension saver in their twenties, Connolly recommends the HSBC FTSE All-Share Index, a tracker fund that aims to replicate the performance of the All-Share index. It offers a low-cost way to gain broad exposure to the UK stock market, with charges of only 0.07% per annum.

For those who would prefer an actively managed fund he suggests Rathbone Global Opportunities, which he says has been managed by James Thomson since 2003, and in that time has established a strong track record. The fund invests predominantly in the US and Europe with the manager adopting a flexible approach, as he searches for under-the-radar and out-of-favour growth companies.


Thomson has put together a concentrated 60-stock portfolio that represents his highest conviction, best ideas. Two-thirds of the fund is currently invested in the US and it is a first-quartile performer over one, three and five years, comfortably outperforming its global sector peer group.

Connolly also likes Liontrust UK Smaller Companies, whichis a higher-risk fund with a strong investment team and an excellent track record. The fund seeks to invest in companies which have a sustainable advantage that is difficult for its competitors to replicate. This could be having high recurring income, distribution networks or intellectual property such as brand and culture.

It is on the large size, with £1bn of assets under management and has a concentrated 68-stock portfolio with 72% of the assets invested in AIM-listed companies. Since the fund was launched in 1998, it has generated twice the return of its smaller companies peer group and five times the return of the FTSE Small Cap benchmark.

Ten years to go

Someone who is 10 years away from going into income drawdown should still have a high element of growth in their portfolio as there is plenty of time to grow the pot further.

Darius McDermott, MD of FundCalibre, says that they may want to consider starting to  take some of the risk out slowly over the decade: “We would suggest a portfolio could be as high as 80% equity at this point and maybe reduce a little more each year in the run up to retirement.”

One of the funds he recommends for someone in this position is JOHCM Global Opportunities, which gives some good geographical diversification and has a manager who thinks first and foremost about capital preservation.

It is a high conviction, benchmark-unconstrained, stock picking fund that currently consists of just 33 different holdings. Since it was launched in June 2012, it has generated annualised returns of 14.6%, compared to the 13.4% achieved by the MSCI World benchmark.

Another of McDermott’s top picks is the £1.6bn City of London Investment Trust (LON:CTY), which  has been managed by Job Curtis since 1991. The shares are yielding 4.4% and net gearing is a modest nine percent. As McDermott explains:

“City of London mainly invests in larger UK companies and has raised its dividend each year for the past 52 years. It has the scope to dip into its revenue reserves to continue raising dividends even when times are bad.”

Alternatively, he suggests the VT Gravis UK Infrastructure Income fund, which invests in infrastructure investment trusts. This has a low correlation to the state of the economy and produces a solid income that can be reinvested.

The aim of the fund is to preserve investors’ capital throughout market cycles, while offering the potential for capital growth and protection from inflation. It provides exposure to a varied range of UK infrastructure assets including solar and wind farms; electricity and water; healthcare; properties; housing; and accommodation. Since it was launched in January 2016, it has returned 31% and has achieved a historic yield of 4.6%.

Preparing for income drawdown

Ben Yearsley, a director at Shore Financial Planning, says that the most important thing to remember is that the majority of people entering drawdown will probably have longer to live than they think, which means that they will need to rely on their pension for longer:

“It could be up to 30 years that you need your pension pot to sustain you. This means that for many people they need to keep growing their capital into old age and therefore have to take a higher risk than they would think is needed −in other words, a higher percentage of equities.”


In the ‘old days’ when annuities were the norm, most people significantly reduced the risk in their pension in the run up to retirement in order to safeguard the value of the fund prior to the annuity purchase:

“This is no longer the case, as the level of equities you need is determined by how much you need your pension to grow, but at least half of the fund, if not a much higher proportion will need to be invested in equities,” explains Yearsley.

If you opt for drawdown it is important not to be forced to sell investments at a bad time or to leave yourself vulnerable to a cut in dividend yields. The best way to avoid this is to have a healthy cash balance to live on and top it up with the natural income from your drawdown portfolio and state pension.

Drawdown portfolio

Retirees will want as high an income as they can get from their pension fund, but the trade-off is that the more they take out, the less chance that their remaining money has to grow. The safest compromise is to withdraw the natural yield of the portfolio, which if fully invested in equities is currently equivalent to about four percent.

Yearsley says that equity income makes a good core for a drawdown portfolio as it offers a high natural yield, with the money invested in companies that are generating cash and trying to grow both their dividends and capital.

His first pick in this area is Franklin UK Equity Income, which he describes as a core UK equity income fund that is mainly invested in large-cap stocks.The £760m portfolio aims to generate an income that is higher than that of the FTSE All-Share, together with investment growth over a three to five-year period.

Since it was created in October 2011 it has generated an annualised return of 8.8%, which is pretty much the same as its benchmark, but has produced a higher historic yield of 4.6% with quarterly dividends. 

Yearsley also recommends the £193m Troy Global Income, which focuses on quality global companies with predictable cash flows and strong balance sheets.

The manager looks for high-quality income at the right price, which should help to ensure that the fund is able to achieve long-term income growth, while avoiding the permanent loss of capital. Since it was launched in November 2016, it has slightly lagged behind the MSCI World Index, albeit with lower volatility and it is currently yielding 2.7% with quarterly dividends. 

His other suggestion is First State Global Listed Infrastructure. This is a long-term fund that owns real assets that are often essential to the economy and which have some element of inflation linking in their income streams.

The £1.9bn portfolio currently has positions in 49 different international infrastructure companies that provide exposure to everything from electric utilities to highways and railroads. Since it was launched in October 2007, it has generated an impressive cumulative return of 232% and is yielding 2.8%.

A pension is the most tax-efficient vehicle to save for your retirement, but it is essential to invest in the right mix of funds if you are to get the best out of it. Your investment objectives will change as you get older, yet it is important to appreciate that you will still need to grow your capital and income even after you’ve gone into drawdown.

Flexible retirement strategy

Nathan Long, senior analyst at Hargreaves Lansdown, says that when people finish work for good they’ll generally benefit from having sufficient secure income from the state; a defined benefit pension and an annuity to cover their essential spending needs; and that the flexibility of drawdown can be used to provide for the retirement nice-to-haves:


“An alternative approach is to remain invested while drawing only the natural income produced and buy several smaller annuities using tranches of your pension as you get older. This allows gradual de-risking of your overall pension, reduces the risk of using all your money to buy an annuity at one point in time and allows you to shape your retirement based on your changing circumstances.”

FUND OF THE MONTH

One fund that would be suitable for most pension pots is Fidelity Global Dividend. It has been managed by Dan Roberts since its launch in 2012 and he is well supported by six other regional income specialists, as well as Fidelity’s extensive analytical research resource.

Roberts’ philosophy is to focus on quality companies that offer a good degree of capital protection during market downturns. This means that the fund can lag in roaring bull markets, but it has still successfully outperformed during the manager’s tenure.

By conducting a detailed examination of the investable universe, he is able to identify companies with stable finances and strong cash flows that underpins the reliability of their dividend pay-outs. The fund targets 125% of the yield on the benchmark MSCI World Index.

Roberts has put together a concentrated 43-stock portfolio that provides exposure to all the main investment regions. He currently favours Europe ex UK and the UK, while being substantially underweight in the US. Since it was launched it has returned 148%, which is 10 percent more than its benchmark.