Retired investors are having to take more risk in order to generate income from their savings. But how much risk exactly?
Since interest rates started to fall, these pensioners have been putting their money in a wide variety of income-producing assets, some of them pretty new.
So let’s look at how each would behave, in terms of both continuity of income and the stability of capital values, in the event of a severe economic downturn, which must be the worst fear of these investors.
First, the new types of asset.
Mini-bonds, whose shortcomings we have covered extensively, must be extremely vulnerable. The companies that issue them to raise money often cannot raise it from banks, itself a bad sign. Many have opaque business models. I would expect many issuers to go bust in a downturn, causing investors to lose all their income and capital.
Retail bonds issued by blue-chip firms, however, should meet their income and capital repayment commitments in full.
Next, peer-to-peer lending. Some of these firms are now a decade or so old and their businesses are in many cases very transparent, with seemingly robust lending practices. I would expect limited losses of income and capital in a recession.
Now to more traditional investments.
Commercial property funds suffered severe dislocation in the wake of the EU vote but normality is steadily returning. The income should be among the safest as it derives from long-term rental agreements, often with very solid retailers, banks and so on. Capital values could well fall significantly, although income investors will often be able to hold on for recovery.
Buy-to-let property is more tricky. As far as income is concerned, much depends on where your rental homes are and therefore how easy it is to attract good tenants. Capital values can be expected to fall, but the real danger is negative equity for highly mortgaged properties. Landlords may come under pressure to sell at a loss.
For shareholders in blue-chip firms, dividends should hold up well, although capital values are likely to fall.
As ever, it is not worth taking unnecessary risk.