How to invest for an income in 2025

Pension holders face an ever more complicated landscape when it comes to looking to invest for an income. Mouthy Money asks the experts how it can be done.

At a time when capital values may be bouncing around in response to the latest missive from the White House, receiving an income from your investments can be a reassuring source of stability.

In today’s market environment, investors have an abundance of choice. It is still possible to pick up an annual income of 5-6% from stock market or fixed income investments out without thinking too hard or doing too much.

Until recently, investors wanting an income from their savings could have secured a reasonable, if unexciting, return from cash deposits. Rates of 5% were not uncommon, which – with inflation at around 2.5% – saw savers’ money grow in real terms.

However, these rates are disappearing fast as Bank of England base rates fall. Online comparison site Moneyfacts points out that rates have now fallen to their lowest rate in two years.

Against this backdrop, the additional income an investor can pick up through the stock market or through a fixed income investment looks appealing. James Calder, chief investment officer at City Asset Management, says there is an “embarrassment of riches” when it comes to getting income from investments and investors don’t have to take a lot of risk to pick up a high yield.

He says: “We don’t have to struggle for income anymore. During the era of 0% interest rates, we generally used equity income funds, which would give us a 3-4% yield when bonds were paying next-to-nothing. We don’t have to do that now.

“Now there are short-dated UK Government bonds that pay 4% or higher, which have tax advantages for retail investors. And investors don’t have to work that much harder to get 5-6%.”

Gilts are a decent starting point for a low-risk investor. Gilts are bonds issued by the UK government and are available on most of the major investment platforms. Investors can lock in an income of 4.5-5% for the lifetime of the bond and then get their money back at the end. While the price of the gilt may bounce around, providing you hold it to term – and the UK government doesn’t default (which hasn’t happened in the 330+ years gilts have existed) – you will get your money back plus the interest.

There are also tax advantages. Dan Coatsworth. investment analyst at AJ Bell says: “Any gains made on gilts are exempt from capital gains tax.

“With some gilts trading below ‘par’ (£100) and offering a low coupon, it means that a good proportion of the return, if held to maturity, comes from capital gains rather than from income. As a result, when the yields on offer are held up next to the interest rates available on deposit, gilts compare very favourably.”

Corporate bonds are the next level up. Investors are taking more risk than they would with a government bond because companies can and do go bust from time to time. However, for large blue-chip organisations, it is relatively rare and investment grade bond funds are usually a steady choice for investors.

In this part of the market, Darius McDermott, managing director at FundCalibre, suggests the Artemis Corporate Bond fund, managed by experienced manager Stephen Snowden. It has a yield of 5.4% and at least 80% invested in investment grade corporate bonds.  

High yield bonds – which are issued by smaller, riskier or more indebted companies – will give a higher income but come with more risk. Default rates rise from near zero for investment grade bonds to 3-4% for high yield.

Calder feels he doesn’t need to take the risk, “we’re getting just as good a return for moderately risky assets”, but for those who are interested in the 7-8% yields on offer, McDermott suggests managers such as Mike Scott on the Man High Yield Opportunities who have a strong track record on credit selection.

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Inflation issues

The problem with all cash and fixed income investments is that they won’t protect against inflation. Until recently, that hadn’t been a significant problem, but inflationary pressures keep rearing their heads. The latest UK inflation reading was 3.5% for April, as a raft of household bill increases came into effect.

Stock market investment has a far better track record of keeping pace with inflation. This is because companies can often raise their prices in line with inflation and therefore mitigate its impact. The first port of call for many investors is the AIC’s Dividend Heroes list. These are a range of investment trusts that have a well-established track record of growing their dividends year after year.

City of London, Bankers and Alliance Witan have all raised their dividends for 58 consecutive years. F&C Investment trust, Brunner, and Merchants are also strong contenders. The longevity of their income record is helped by the investment trust structure, which allows them to reserve dividends in strong years to pay out in weaker years. Many of these trusts have built up good reserves to see them through difficult patches.

Elsewhere in the equity income sectors, investors could do worse than look at the UK, which has the highest yields of any major market. It has been unloved for some years and looks cheap relative to other markets. A multi-cap income fund can also capture the bargains on offer in the unfashionable small and mid-cap sectors, while retaining the ballast of larger cap UK companies. The Jupiter UK Multi-Cap Income or Marlborough Multi Cap Income funds could be good options.

For a global option, Gavin Haynes, investment consultant at Fairview Investing, suggests the Artemis Global income fund: “While growth focused tech stocks have been much loved, income producing shares remain cheap in comparison. Dividend income could prove to be more important than it has been over the past decade. The Artemis fund follows a value approach looking for unloved cheap dividend producing stocks.”

A final thought would be the yields available from areas such as commercial property or infrastructure. Both asset classes have struggled in an environment of rising interest rates, but should now have a tailwind.

While there is lots of choice on offer, McDermott likes the TR Property Investment trust, which invests in the shares of property companies of all sizes and has a yield of 4.9%. Infrastructure funds tend to have reliable, inflation-adjusted cash flows and are invested in solid assets such as toll roads, utilities, hospitals or schools. First Sentier Global Listed Infrastructure is a solid choice.

After many years when stock markets have been all about AI, the US and technology companies, dividends may be about to become a more important part of overall returns for investors. Either way, they can be a reassuring and reliable source of return during uncertain times.

Disclaimer

This article is produced for general informational purposes only. It should not be construed as investment, legal, tax or other forms of financial advice.

If in any doubt about the themes expressed, consider consulting with a regulated financial professional for your own personal situation.

Past performance is no guarantee of future results. Investments can go down as well as up and you may get back less than you started with.

Investments are speculative and can be affected by volatility. Never invest more than you can afford to lose.

For more information visit www.fca.org.uk/investsmart

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