Four key reasons to embrace income investing in 2025

In recent years many assets which distribute little or no income have afforded investors very impressive returns - high-growth US technology stocks have continually attracted investor attention and rewarded equity holders handsomely - while more esoteric assets like cryptocurrencies have in some cases also seen values rocket. It is debatable whether such winner-takes-all performance is sustainable many years into the future. Investors may have grown accustomed to rapid capital returns from tech and artificial intelligence (AI) related stocks (some of which may now be priced for perfection) and possibly overlooked the steady compounding benefits of income investing.

It is true that over the last two calendar years, the so-called ‘Magnificent 7’ - the largest technology and AI-related stocks in the US – collectively returned 75% in 2023 and 63% in 2024, whilst most income-generating assets like fixed income, dividend stocks and commercial real estate lagged. Equally, another of last year’s stellar performers, gold - which advanced 27% (in US dollar terms) - also generates no income.

Advisers and clients may want to consider either diversifying into income-generating assets to protect profits and bolster their portfolios or using a multi-asset option which can do the leg-work for them. In flat or falling markets, income-paying assets typically outperform growth assets, offering some downside protection such as during the tumultuous first half of 2022.

From April 2027 inherited pension pots will become potentially subject to inheritance tax (IHT). Defined contribution and personal pension savings will be factored into the estate value calculation, likely pulling far more estates into the IHT net. Furthermore, this is also likely to mean an increase in the number of large (above £2million) estates, where the residence-nil-rate band (the additional £175,000 afforded to homeowners over and above the standard nil-rate band of £325,000) tapers away. As a result, clients are likely to need to revisit pension strategies, particularly around taking tax-free-cash, when and how to draw an income from pensions, and how one might gift tax-efficiently to their family. We think a full review of decumulation strategies in retirement is required to adapt to this change.

For most people, the strategy of simply accumulating monies within a pension as a means of reducing a potential IHT liability will no longer be effective. Instead, pensions will likely be used as was always intended at the outset: to provide a sufficient and steady retirement income. We anticipate a shift towards drawing pensions down and perhaps using pension assets to facilitate the gifting of funds which utilises annual allowances, or gifts recorded as surplus income, as ways to minimise and mitigate IHT.

With the Bank of England’s interest rate cycle having seemingly peaked, and interest rate cuts already underway from the 2024 high of 5.25% to the current 4.5% at the time of writing, markets expect further base rate reductions, with 50bps of cuts forecast in the next twelve months. Cash savings have already become less attractive for income seekers, especially with inflation eroding purchasing power, and tax on interest impacting higher-rate and additional rate taxpayers’ returns (currently UK CPI forecasted to reach 3.7% in September). Furthermore, as interest rates have come down, and are currently expected to fall further, cash investors must contend with reinvestment risk as well; it will likely not be possible to reinvest maturing cash deposits at rates as high as in the recent past.

A further major change in recent years has been around the viability of annuity rates, which have surged driven by rising UK gilt yields. Annuity sales stand at 10-year highs, in 2023/24 sales were up +39% from the previous year according to the FCA. However, with interest rate cuts expected to continue through 2025, annuity rates are likely to fall and retirees may once again turn to pension drawdown alongside or instead of annuities.

For potentially better returns and greater flexibility, a diversified income portfolio could well prove a more attractive option than cash deposits or annuities.

In recent years, global investors have shifted their focus to economies considered the most dynamic, and to those high-growth sectors like tech - which are underrepresented within the benchmark UK equity index, the FTSE 100. This has resulted in UK stocks often being somewhat eschewed in favour of higher-growth markets and sectors. Consequently, many UK-listed companies - including those which are global leaders in their respective fields - now appear undervalued compared to their US counterparts.

The largest publicly-listed UK companies are established, mature businesses, which focus on dividend yield as a means of providing stable shareholder returns, rather than principally reinvesting profits to facilitate future growth. The FTSE 100 index is heavily-weighted towards those sectors which tend to have higher dividend yields like energy, financials and utilities, offering a range of strong income generating opportunities for investors.

A well-diversified and well-managed portfolio of income-generating assets - such as dividend stocks, bonds, and alternative investments like commercial real estate and infrastructure - can help grow income and steadily grow and protect capital. Income strategies remain a smart, complementary and effective way to balance steady returns with long-term growth.

Financial markets have experienced a fundamental change since 2022. After many years of very low interest rates and low bond yields, investors have had to adjust to the normalisation of interest rates and a backdrop of higher yields. In our opinion, such an environment is more fertile for active managers – in stock selection and asset allocation – and multi-asset strategies which incorporate both income and capital growth should afford investors greater opportunities to fulfil their objectives.

For more information on our full range of income strategies please contact your TrinityBridge adviser or regional Business Development Director.