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Investments, Retirement

Retirement income under pressure after rate cut

Retirees may need to reconsider their income-generation investment strategy following the recent interest rate cut and the flushing out of excess franking credits before the federal election, according to a retirement income-focused investment manager.

Plato Investment Management managing director Don Hamson said rate cuts will continue to reduce the income retirees receive from floating-rate income investments at the same time as overnight cash rates and 10-year government bond yields are also trading at historical all-time lows.

“Returns on cash, term deposits and products linked to bank bill rates will likely continue to fall under that scenario. Many income-related products, like income securities or bank hybrids, are priced at a margin to bank bill rates, and we have already seen 90-day bank bill rates fall more than 60 basis points this year, which is already crimping their income,” Hamson said.

“Retirees living off cash-linked income will struggle to make ends meet. So, it is very timely for retirees to reconsider their income-generating asset mix. Thankfully, given the somewhat surprising election result, retirees can continue to bank on receiving franking credits from Australian share investments.”

He pointed out that while interest rates were low, dividends paid by Australian companies were at a high, and the proposal by Labor to end franking credit refunds resulted in a number of companies releasing excess franking credits and providing income investors with a record level of dividends.

This income, however, was not spread evenly among investors or retirees, or listed companies, and retirees should reconsider if their income-generating investments were in the best possible income-generating equites, and not just the major banks and Telstra.

“Dividend increases, for example, have been largely concentrated in the resources sector, with traditional income stocks like the big four banks and Telstra either maintaining or cutting dividends,” Hamson said.

“A cut in interest rates – while it won’t lead to an increase in dividend income – will also lead to increased investor demand for dividend-paying stocks, raising the capital value of some.”

The Reserve Bank of Australia yesterday cut official interest rates by 0.25 percentage points to a record low of 1.25 per cent.

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