How investment trusts might be made to suit "pension freedomers"

Investment trusts could use their ability to play around with capital/income definitions to work for a new class of investors – pension freedomers. Merryn Somerset Webb explains how.

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A new generation of pensioners could be served by investment trusts

When is a dividend not a dividend? When it is paid out by an increasingly number of investment trusts.

This week, Scottish Mortgage one of the trusts we hold in our investment trust portfolio announced that the income from the companies in which it invests is not high enough to cover the dividend it intends to pay out this year. So the dividend will be paid out of its revenue reserve (the saved-up income from past years). Next year, things will be worse: there probably won't be enough left in the reserve to pay the dividend. So the directors have said they will pay the dividend out of capital.

This is entirely above board (investment trusts were given the right to do it last year). But in the past I haven't been too keen on it as an idea: capital and income are taxed in different ways and it isn't up to the directors of a trust to decide on behalf of investors which is which. If there isn't the income to pay a dividend, and investors still want to withdraw money from a fund, they can surely make their own decision to do so and sell some of their shares on which they may or may not pay capital gains.

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As far as I can see the very idea of doing it for them was yet another horrible manifestation of the perverse effects of super low rates: if everyone wants income, the financial industry will find a way of giving it to them or at least pretending to give it to them.

However, I am now beginning to see how investment trusts might start to use their ability to play around with capital/income definitions to work for a new class of investors pension freedomers.

This lot have a set lump sum they have to make work for them over a 20-30 year period. Most of them won't be able to survive on the income alone: they will have to use the capital too. And how can they make sure that they use the capital carefully and gradually? Via a fund that promises to give them an income of, say, 3% every year in whatever balance of capital and income that works (as annuities used to, albeit while taking all of your capital hostage).

I don't think that this is what Scottish Mortgage is explicitly trying to do it isn't the kind of fund most people suggest for pensioners. But other funds of its size with a more diversified brief might like to think about it.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.