Merryn's Blog

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.

160516-pensioners

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/investments/funds/investment-trusts/600757/why-investment-trusts-are-the-best-vehicle-for-your
Sponsored

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Visit/520115/investment-trusts-the-cinderella-of-investment-arrives-at-the-ball
Funds

Investment trusts: the Cinderella of investment arrives at the ball

Investors should look beyond the market noise of a single year and examine the bigger picture. Max King explains what we can learn from 25 years of in…
8 Jan 2020
Visit/513684/companies-cut-back-on-their-pensions-bills
Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019
Visit/511175/seven-investment-trusts-to-make-your-investments-go-global
Stock markets

Seven investment trusts to make your investments go global

The outlook for equities remains encouraging. An investment trust with an international remit will help you profit.
23 Jul 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/investments/stocks-and-shares/600863/sirius-minerals-anglo-american-takeover
Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020
Visit/currencies/600842/eur-usd-euro-slide-against-us-dollar
Currencies

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020