It has now been 10 years since the then chancellor George Osborne, introduced the so-called ‘pension freedoms’ for individuals with defined contribution pension savings.

‘Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity,’ Osborne announced in his budget speech on 19 March 2014.

While a lot has happened in the world of UK pensions since then, this remains perhaps the most monumental change of legislation we have witnessed in our lifetimes, shifting the risk irreversibly from the state and employers to individuals.

For many of us, with little or no defined benefit pension to rely on, the level of comfort and financial security in our final years will be determined by how much we’ve saved, how kind the markets are to us, and our life expectancy.

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DRAWDOWN RISKS AND BENEFITS

Key benefits

Take the income you want, when you want. Keep your options open if your circumstances change.

Beat inflation with returns from your investments. Help maintain buying power as prices rise.

Pass on your money – anything left when you die can normally be paid as a lump sum or as income.

Key risks

You could run out of money if you withdraw too much, your investments don’t perform as you hope or you live longer than expected.

Income isn’t secure, it could fall or even stop completely.

It’s possible you’ll get back less than you originally invested, as all investments can fall as well as rise in value.

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By removing the obligation on new retirees to swap their pension savings (or, at least 75% of them) for an annuity gave Brits more options in how and when they access and manage their nest egg through their later years, it also turned on its head the old thinking about investment risk.

 

NIGHTMARE SCENARIO

Before pension freedoms, the nightmare scenario was a sharp fall in the value of your pension pot in the run up to your retirement. The traditional way to mitigate that risk was to gradually shift away from more volatile assets like shares and into cash or bonds.

This still stacks up for those preferring the financial security of a guaranteed income for the rest of your life that an annuity provides. It also helps that annuity rates have rallied in recent years as interest rates and gilt years have gone up. But with interest rates now on a downswing, an excess of prudence could leave future retirees increasingly exposed to inflation, the biggest threat to a comfortable retirement.

Fortunately, pension freedoms give investors an alternative option – so-called ‘drawdown’, a flexible option that lets you control how much you withdraw and where you invest. It also offers the potential for real-terms growth (over and above inflation), although investment returns aren’t guaranteed.

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WHAT DO WE MEAN BY 'PENSION FREEDOMS?'

‘Pension Freedoms’ are rules that give you more control over your retirement income. Before the introduction of pension freedoms, you could typically take a 25% tax-free withdrawal from your retirement fund, then use the rest to purchase an annuity to generate an income.

However, an annuity might not have necessarily suited your individual circumstances. For example, if you pass away before your annuity income exceeds the total value of your pension pot, you might not get to make the most of your retirement savings.

After their introduction, pension freedoms increased the number of options for savers when they reach the normal minimum pension age of 55 (rising to 57 in 2028).

 

According to survey data by insurer Royal London earlier in 2025, typically:

• 8% took it within six months of turning 55
• 26% deposited it in a bank or savings account
• 19% used it for home renovations
• 8% gave it to their loved ones

 

 But now, you are no longer forced to purchase an annuity with the remainder, you can withdraw as much or as little as you want, when you want it. 

As well as lump sum withdrawals, another option now available is so-called ‘flexi-access drawdown’. This allows you to take the income you need while keeping the rest of your fund invested. This income is typically taxable, but it does allow your pension to continue growing and accumulating wealth, even after you start drawing from it.

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DRAWDOWN FLEXIBILITY

The flexibility of drawdown can be an advantage, but it also comes with more risks. Your income isn’t secure, and you could run out of money if your investments don’t perform as well as you might have hoped. The hands-on approach of drawdown won’t be right for everyone, so it’s important you weigh up the risks and benefits.

For some, the belt and braces approach may be to combine the financial security of an annuity with partial drawdown, where you use part of your pension pot to buy an annuity, leaving the rest invested in a diversified portfolio of funds that will (hopefully) give you the right combination of income and growth.

The exercise here is to provide investors with a handful of ‘foundation funds’ that should help do that. This is not meant to be a ‘do it all’ drawdown portfolio. It is designed to give investors some ideas that will cover crucial long-term retirement bases – like stable income – Twentyfour Select Monthly Income Fund (SMIF), steady growth – Merchants Trust (MRCH), gold – iShares Gold Producers (SPGP) etc – to which they can add their own investment ideas to build a more diversified portfolio that is right for them and their retirement years ahead.   

 

FUNDS FOR RETIREMENT

3i Infrastructure (3IN) 349p

Investors seeking a combination of capital growth, inflation busting dividend growth and a decent income should look no further than 3i Infrastructure (3IN).

This trust provides investors with a diversified portfolio of unique private sector infrastructure businesses that are resilient, making them suited to a retirement portfolio, and well positioned to benefit from four megatrends.

These include the energy transition, digitalisation, demographic change and renewing vital infrastructure. The resulting portfolio has growth characteristics which allows the company to pay a growing stream of dividends ahead of the rate of inflation.

Since 2019 the company has grown dividends per share at a compound annual growth rate of 6.5% a year while the current yield, based on the targeted dividend for 2026 is 3.9%, covered nearly three times by earnings per share.

The company has delivered an annualised growth rate in net asset value including ordinary and special dividends of 17% a year over the last decade. This is comfortably ahead of peers and its own targeted rates of return.

The trust sits on an unwarranted 10% discount to net asset value as of the last update on 31 March.

The roughly £4 billion portfolio is comprised of 12 assets which satisfy the investment manager’s criteria for investment and benefit from one of the identified megatrends.

The investment criteria include assets which are difficult to replicate, provide essential services, have established a leading market position, good visibility of future cash flows, and opportunities for further growth.

A good example of the types of assets held in the portfolio is TCR, Europe’s largest independent asset manager of airport GSE (ground support equipment). It operates at more than 230 airports across more than 20 countries.

Reliable GSE is critical to the efficient running of airports and TCR helps deliver this service alongside access to scarce airside repair workshops, providing high barriers to entry.

Fleet optimisation is also important in the context of enabling decarbonisation of airport ground operations.

TCR has secured multiple commercial contract wins including a centralised all-electric Ground Support Equipment pooling contract at JFK International Airport New Terminal One.

In a trading update on 3 July the company said its portfolio companies were generally performing in line or ahead of expectations. [MG]

 

iShares Gold Producers (SPGP) £19.68

Gold is a useful diversifier in a retirement portfolio as it is typically uncorrelated with other asset classes – often offering a safe haven at times of market uncertainty.

The big drawbacks with gold include the fact it does not offer any income and it is already trading pretty close to all-time highs. There are reasons to think the precious metal could trade higher still but one solution to the lack of yield and elevated price is to invest in the companies which dig it out of the ground.

As the chart of the iShares Gold Producers (SPGP) ETF shows, gold miners have not kept pace with the move higher in the gold price.

Investing in gold miners, while it comes with operational risk, also allows you to typically secure income from dividends and enjoy outsized gains if they can deliver growth.

Plus, putting your money to work in a diversified fund of gold producers protects you from the risk of being caught out by the failings of individual companies.

In the current gold price environment, gold producers are generating significant cash flow. Canadian operator Barrick Mining (ABX:TSE), for example, generated $2.5 billion in operating cash flow in the first half of 2025 up 32% year-on-year. This helps underpin generous shareholder returns, although note this ETF is accumulating, meaning the income from underlying holdings is reinvested.

The product has an ongoing charge of 0.55% and has delivered a 10-year annualised total return of 17.3% versus 14.7% from BlackRock Gold & General (B5ZNJ89), the big actively managed gold mining fund which has a much higher ongoing charge of 1.16%.

Top constituents include the aforementioned Barrick, US-listed Newmont (NEM:NYSE) – the world’s largest gold miner with operations across the globe – and Wheaton Precious Metals (WPM) which buys precious metals production from third parties – typically where this is a by-product to another metal. [TS]

 

Latitude Horizon Fund (BDC7CZ8) 167p

This £472 million all-weather fund aims to deliver capital appreciation over the long term by holding a concentrated portfolio of global stocks, whilst lowering the equity risk and enhancing return through a selection of uncorrelated non-equity holdings.

Managed by a team of experienced professionals headed up by Freddie Lait, the investment philosophy is to keep things simple and focus on protecting and growing clients’ capital though cycle. This focus on protection is likely to be attractive to someone investing in their retirement.

The fund has delivered a total return of 41.5% over the last five years and 15.5% over the last three years, comfortably ahead of the total return from the Investment Association’s Flexible Investment category.

Lait and the team believe consistent risk management is the most important success factor in capturing returns in rising markets and protecting portfolios in weak markets.

The team have identified four main risks facing investors including an overvalued US stock market, a high concentration in AI and technology stocks, government spending and deficit risks to bonds and finally, a slowdown in consumer spending leading to recession.

It is important to mitigate and protect against these risks, even though none of them are inevitable, due to the potential harm they can cause to portfolios.

At the same time, it is important not to overexpose the portfolio to any one risk, says Lait.

In terms of the equity portion of the portfolio, Lait believes it remains well diversified and inexpensive relative to the market, which should provide some protection. In addition, Lait believes most holdings are ‘defensive’ in nature and ‘would perform strongly in a recession, should one happen’.

Turning to the non-equity holdings which, represent 52% of fund assets, the fixed income allocation has an average duration of just two years, making it defensive. Duration measures the sensitivity of bond prices to a change in interest rates.

The currency exposure of the fund is diversified across sterling, the US dollar, euro and yen.

‘Betting on any one outcome in markets might make you famous, but it rarely makes your clients rich.

‘We don’t believe we know what will happen but do believe the portfolio is built robustly to withstand many of these potential risks, while generating reasonable returns over time,’ adds Lait. The fund has an ongoing charge of 1.15% a year. [MG]

 

The Merchants Trust (MRCH) 555p

Investors seeking to bolster their income in retirement should buy The Merchants Trust (MRCH), among the higher-yielding trusts in the AIC’s (Association of Investment Companies) UK Equity Income sector.

Merchants has grown its dividend for 43 years at an annualised growth rate above inflation, bringing it coveted ‘Dividend Hero’ status. And following the board’s use of revenue reserves to sustain dividends through the Covid-19 period, the trust has been able to rebuild reserves in recent years, which should ensure payouts can continue to rise during any difficult periods encountered in the years ahead.

Founded in 1889, Merchants’ current manager Simon Gergel looks to deliver a high and rising income together with capital growth through a policy of investing mainly in higher-yielding large UK companies. However, the trust’s investment philosophy prioritises value, which often leads Gergel to mid and small cap stocks, which are typically more domestic focused and cyclical in nature.

Seasoned income-seeker Gergel continues to see value and a healthy number of opportunities across the UK stock market. Recent additions to Merchants’ portfolio include Reckitt Benckiser (RKT), the consumer products powerhouse whose strong brands include Dettol, Finish, Nurofen and Durex. Gergel initiated the position with Reckitt’s shares trading well below his assessment of fair value and paying a 4% dividend yield.

Lower down the cap spectrum, he has initiated a position in Begbies Traynor (BEG:AIM), the UK insolvency practitioner with ‘a fantastic record of organic growth and well-timed acquisitions at modest prices over the last decade’, as well as a ‘great record of profit growth and cash generation which has allowed the company to de-lever from a fair amount of debt to having virtually no debt’. Another addition to the portfolio is Serco (SRP), the outsourcing leader which recently delivered better-than-expected first-half results and announced a new £50 million share buyback.

Merchants’ top 10 holdings as of 30 June 2025 included UK lender Lloyds (LLOY), pharma and biotech giant GSK (GSK) and cigarettes titan British American Tobacco (BATS), alongside energy giant Shell (SHEL) and mining company Rio Tinto (RIO). [JC]

DISCLAIMER: James Crux has a personal investment in The Merchants Trust.

 

TwentyFour Select Monthly Income (SMIF) 87.6p

We believe TwentyFour |Select Monthly Income (SMIF) is one of the undiscovered gems not just of the investment trust world but the whole London stock market.

The fund generates an attractive risk-adjusted return, mainly through income, by investing in a broad range of fixed income products but specifically in less liquid securities which don’t suit open-ended funds and where it can earn a higher yield.

That is not to say it invests in ‘junk’ or low-quality bonds – over 70% of the fund is in bonds rated BB or above, with more than two thirds invested in UK and European bank debt issued by firms such as Barclays (BARC), NatWest (NWG), Nationwide, Banco Santander (SAN:BME) and Intesa SanPaolo (ISP:BIT) or ABS (asset-backed securities) issued by well-known borrowers.

Most of the assets have a maturity of between one year and seven years, and the fund targets a net total return to investors of between 8% and 10% per year.

When it was launched, this meant an annual dividend of 6p and a target capital return of between 2p and 4p, based on the original share price of 100p, and the 6p annual dividend has consistently been met while over the past one year and three years the total annual return including dividends has been over 13%, well above the original 8% to 10% target.

One of the most attractive features of the fund is it pays dividends monthly, giving investors the choice of taking a regular income stream or reinvesting to compound their returns.

In their latest market commentary, the managers say the fund ‘navigated market uncertainty well’ during July, posting another positive total return for the month, with corporate bonds performing strongly and insurance and Additional Tier 1 again making the biggest contribution to performance.

‘Despite the economic and political volatility of the past few months, developed markets remain in a strong position heading into the latter part of the summer. Fundamentals continue to be solid, with earnings releases so far bringing no negative surprises from a credit point of view,’ add the team. [IC]

Disclaimer: Ian Conway has a personal investment in TwentyFour Select Monthly Income

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