In the current low return environment, high natural yield investments are not enough to support income in retirement, Royal London has warned.

According to new research by Royal London, Don’t chase risky income in retirement, the current era of low interest rates means that very few types of investments now generate an adequate natural yield to support retirement income. The paper highlights the risk to investors of chasing high risk investments to generate income.

Royal London highlighted that chasing high natural yields, therefore, is taking a large risk with capital and results in a poorly diversified portfolio, which exposes funds to volatility during market fluctuations.

Those looking for natural yield from property, high yield, credit, gilts and cash, will generate considerably lower yields in 2018 in comparison to higher yields in December 1998 to September 2008, the report revealed. Instead, those aiming for an adequate level of natural yield are now opting for exotic high yield investments, Royal London said.

In contrast, the research also noted that that the other extreme of being ultra-cautious will also generate low retirement income levels, particularly because of low interest rates and increasing longevity. This could increase the possibility of pensions running out too early, Royal London said.

As a result, a balance is needed between the two, the research concluded. Royal London explained that investors must focus on getting the risk level right by investing across a range of asset classes that generate income and capital growth. This will reduce volatility and is more diversified than living purely off of natural yield.

The paper recommended that savers reinvest dividends, coupons and interest payments to support their fund and generate an income by selling units of capital each year.

Royal London Asset Management head of multi-asset Trevor Greetham said: ‘The strategy of hoping to generate enough income in retirement from the natural yield on investments may have worked before the financial crisis but is highly risky in today’s low interest rate environment. Savers need to realise that chasing after high yielding investments today can involve investing in an unhealthily narrow range of assets that could suffer large capital losses as interest rates rise.

“Our research shows that it is possible to have a good standard of living in retirement by investing across a risk-controlled mix of assets, targeting both income and capital growth. Investment conditions today are a world apart from those before the financial crash, and retirement investment strategies need to change accordingly’.

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