Investing for income: a clearer approach

‘Income’ as an investment strategy should not be viewed as a catch-all. Drill down, and there are a variety of different strategies, each with their own outcome.

Rethinking income solutions: beyond labels and volatility

By Henry Cobbe, Director & Head of Research, Elston Consulting

How can I plan for retirement? Income in a retirement portfolio. What different income funds are there?

​When it comes to income solutions, we need to move beyond simplistic labels and outdated frameworks. “Income” is a deceptively familiar word—everyone thinks they know what it means. But in reality, it means different things in different ways.

When thinking about income, advisers should not just think about yield, but about target outcomes. And achieving targeted outcomes require a more nuanced understanding of risk—not just volatility, but also duration and inflation.
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At Elston, we have developed a range of income strategies that reflect this broader perspective. From near-term cash alternatives to long-term equity income, we think about income in terms of suitability to client goals, not just as an asset class or risk profile.

Near-term income (yield)

​At the lowest end of the volatility spectrum is our money market MPS and near-term direct gilt MPS are designed for clients seeking low volatility and short duration. These are ideal for basic and additional rate taxpayers respectively, with the former offering returns in line with Bank of England Bank Rate of 4% and the latter offering a more tax-efficient yield of up to 6% equivalent thanks to CGT exemptions on low-coupon gilts. It’s why private banks use them and why advisers should consider them too.  This has lowest volatility risk, but has highest inflation risk over time.

Balanced Income

​In the middle of the volatility spectrum, we offer multi-asset income portfolios—our Core Income range—across five risk profiles. These are designed to balance volatility, duration and inflation risk, providing a steady income stream without sacrificing long-term purchasing power.  This creates a balance between volatility risk and inflation risk.

Equity Income

At the higher end of the volatility spectrum, the UK Equity Income Fund focuses on dividend-paying equities and pays income monthly. This has higher volatility but over time has the lowest inflation risk. Over time, only equities can pass through price rises. If you are worried about the cost of a pint, own the brewers. If you are worried about your phone bill, own the phone companies. That is how you preserve purchasing power. 
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We also like UK equity income for its diversification benefits. Since Brexit, the correlation of UK equities with global markets has declined substantially. That makes them a great counterpoint to US growth stocks. They are boring, yes, but boring is good when it zigzags against the rest of your portfolio.

Retirement income

​Traditionally for many strategies, income means yield.  For retirement, it’s not about yield alone.  For retirement portfolios, it means non-guaranteed inheritable withdrawal of capital and its total returns over time (encashment of units).  For, annuities it means the guaranteed uninheritable return of capital and its total returns as a payment stream whilst alive.

Summary

​Ultimately, income solutions must be aligned to client outcomes. Risk isn’t just about volatility, it is about the risk of not meeting your client’s goals. That is why we encourage advisers to think in terms of “now, soon, and later” buckets, and to move beyond the traditional 1-to-5 risk scale. It is not about labels, it is about outcomes.
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We have built these solutions to be platform-agnostic, tax-aware and outcome-driven. And we are here to help advisers deliver smarter income strategies that reflect the realities of retirement, not just the assumptions of the past.