Investing in retirement

Making investment decisions

If you’re planning to use your pension to take income flexibly (known as pension drawdown) or take your pot as a number of lump sums, then you’ll need to make some decisions about how to invest your remaining pension pot.

Your provider will usually ask you how you want to invest your remaining pot when you move into pension drawdown or begin taking lump sums. You will either need to choose your own investments, i.e. ones that match your attitude to risk and the objectives for your money, or some providers may offer you ready-made investment options. You could also use a financial adviser to help you choose.

As with all investments, the value of your pot can go up or down.

What’s different about investing your pension pot when you’re taking money out

When you switch over from building up money before retiring to taking money out to move into your retirement, the way you invest your pension may need to change to reflect your new goal.

When you’re building up your money, generally you’ll be trying to grow it as much as possible in the early years. But, as you approach retirement, that may change. Now you’ll be trying to grow it to keep pace with inflation while also trying to protect it from any big drops in value.

Once you begin taking money out, the way you invest your money needs to be more personalised to the goals that you have for using your money.

For example, if you’ve taken some money, maybe to pay off your mortgage, but are not actually intending to start drawing it down for retirement until a few years later, you may want to focus on protecting the money and still trying to grow it slightly.

If, on the other hand, you want to begin using the money to give you an income for the rest of your life, then you should generally  choose investments that offer stable growth. This means ones that won’t go up and down too much as the stock markets change.

This is important because if your pension pot drops in value and you continue to make withdrawals from it, it’ll be much harder for it to recover its losses when the stock market rises again. It’s particularly important in the early years of your retirement where it can disproportionately affect how long you might be able to take income for.

Remember, most people will live 20 years or more in retirement and, if you take too much too early, especially when the markets are on a downturn, you could significantly reduce how long your income will last.  

Managing retirement and investment risks

If you want to keep your pension pot invested and take money from it there are a number of things that you need to take into account when thinking about deciding what to invest in. 

Your attitude to risk and ability to handle losses

How much risk you take with your investments will affect how your money rises and falls. In turn, this can affect how much income you’re able to take and how long it lasts so it is important to understand how much risk you’re willing and able to take.

Risk of living a long time

The average life expectancy for most 65 year olds today, is another 20 years. However, many will live longer than this. That’s why you need to plan to have an income for at least this time, if not, potentially a lot longer. One in 10 people will reach age 100. You can check how long your expected to live using the ONS life expectancy calculator

Inflation risk

Over a long time, inflation will reduce the value of your savings. Even a low inflation rate will reduce the purchasing power of your money.

Risk of running out of income

The longer you live and the more you take out of your pot, the harder it’ll be to make your pension pot last as long as you need it to. To try to avoid this happening you need to manage your pension pot carefully. This includes thinking about how much to take out, how often and how to invest your pension pot. 

Working out how much you can safely take out from your pension

How much you should and can safely take from your pension will depend on what you want to use the money for, how long you want to withdraw it over, how often you want to withdraw and how you choose to invest your money.

If, for example, you’re wanting to use one pension pot or part of one pot to give you income that can bridge a gap between stopping full time work and reaching State Pension age, then you’ll be looking to withdraw an amount roughly equal to the amount you need each year to bridge that income gap.

If, on the other hand, you’re looking to withdraw money to support your income needs for the rest of your life, which could be a few decades, then it’s a good idea to limit withdrawals to somewhere between 3-5% of your pension pot. That means if you have £100,000 in a pension pot, you would start withdrawing £3,000 - £5,000 a year.

You should review your investments and the amount you’re withdrawing regularly - at least yearly. You can then make adjustments depending on the value of your pension pot.

If it’s grown by more than you expected, you may be able to take a little more out. If it’s gone down more than you expected, you may want to think about taking a lower amount for a time until your pension pot has recovered a bit.

How much you take out and how often is one of the biggest factors affecting how long your income might last so it’s important to consider this carefully.

How should I choose what to invest in?

There are a number of different options and approaches that you could use. Which one is right for you will depend on your circumstances and objectives.

A good way to approach this is to think about how hands-on you want to be with managing your investments in retirement and how much knowledge and experience you have.

You could choose to:

  • use a financial adviser
  • use ready-made investment options
  • create your own portfolio.

Getting financial advice

Most people don’t have the level of experience needed to safely manage their own investments confidently, so are happier to leave it to a financial adviser.

An adviser can look at your health, financial position, including your attitude to risk and ability, so they can handle the downsides of keeping your money invested in retirement. They will then be able to create a financial plan that’s suited to you.

That will include assessing which products are best able to meet your particular needs.

If a flexible retirement income product is suitable, they can look at how much money would be appropriate to take out of your pot and recommend how to invest your pension to achieve your goals.

They can also see how different scenarios could affect you in the future.

If you’re happy with the plan, your adviser can then get everything set up for you and will usually review your plan with you every year to make sure you're still on course for the retirement you want, and that your income still meets your needs.  

Ready-made investment options

Depending on the type of your pension and who it’s with, your pension provider may offer ready-made investment options that help simplify the decisions around how to invest your remaining pension pot.

There may be differences in how these work or who they’re appropriate for, so you should speak to your provider to find out if they offer these.  If they do, get them to explain the options to you. 

If you’re in certain workplace pensions or if you’re in a pension you’ve set up yourself such as a personal, stakeholder or self-invested personal pension, you may be offered the option to invest in an investment pathway. An investment pathway is a ready-made investment option linked to one of four retirement objectives.

They’re based on what plans you might have for your money over the next five years. They’re managed by your provider, so you don’t need to worry about choosing your investments.

Creating your own portfolio

If you’re thinking about creating your own portfolio, then you can draw down your capital – either from cash, by selling investments or you could select investments that produce natural income. Building a portfolio that uses all three approaches, such as by dividing your pension into separate pots, could give you the best chance of making your money last as long as you need it to. 

Cash

Keeping some of your pension pot in cash can be a good idea because it means your immediate income needs can always be met.

Furthermore, you don’t need to sell down investments before your income can be paid out to you.

This can be a big advantage when markets are down as it means you don’t need to sell investments when prices are low. That will help to protect the value of your pension pot over the long term.

Just remember to keep an eye on your cash pot and top it up if you need to.

Investing all of your pension pot in cash is generally not a good idea unless you’re planning to take it all out within a short period of time.

There are two reasons for this.

Firstly, without your money growing, the length of time your money will last is simply the value of your pension pot divided by the amount of annual income you want to take. For example, if you have £100,000 and you take £5,000 a year, this will last 20 years and no more. If you live longer than 20 years, and many people will, you’ll have no money being paid out to you from this pension pot.

Secondly, inflation generally means that prices will rise over the long term and therefore the money you take out today will not buy the same amount in five, ten, 15 or 20 years’ time.

This means you may need to take more money out of your pot to maintain your living standards and, if you increase your withdrawal amounts, your pension pot will run out even quicker.

Income generating investments

Income generating investments can be a great way to invest in retirement. These include bond funds, income funds and multi asset funds.

You could choose to invest in government or company bonds, or company shares that pay dividends rather than funds, but these tend to be more risky.

One benefit of investing in funds is that they hold investments with lots of different companies. This can help to smooth out the ups and downs in share price and income, giving you more certainty when compared to holding  individual investments yourself.

They’re also looked after by a professional manager who’ll review and make changes to the companies it holds from time to time.

Any income the funds pay out can either be used to help pay any regular income you have set up, or could be used to top up your cash pot. This type of fund may also keep paying you an income even if markets drop. This not only means you may be able to keep your income or cash pot topped up, but it may help avoid you having to sell any of your income investments or growth investments, helping to protect the value of your pension pot over the long term. 

Growth investments

For your pension pot to last a long time (20 years or more), you’ll want to continue to try and get it to grow. Keeping some of your pension pot invested in growth investments – such as funds that invest in company shares – can help you grow your pension pot, helping your savings to keep pace with inflation.

However, there is risk involved and the value of shares will go up and down.

If your investments do go down there can still be time for them to recover, although this is not guaranteed, and you might not get back what you invested.  When markets are favourable, you could also sell down some of these investments so you can top up your pot.

How often should I review my investments?

You should monitor the investments in your pension pot regularly, at least once a year, to see how they’re performing. The more often you review them, the greater chance you have of spotting any early warning signs of potential trouble ahead.

Things to keep track of include:

  • The value of your pension and investments.
  • The amount you're taking out (you may want to adjust it up or down depending on how the value of your pension has changed since you last reviewed it).
  • Your income needs.
  • Your attitude to risk and ability to handle any losses.

If there has been a change to any of the above, you may want to consider:

  • adjusting the amounts, you are taking out up or down depending on how the value of your pension has changed since you last reviewed it
  • whether keeping your pension pot invested is still the right thing for you
  • if a change is needed to the investments you have chosen
  • if it might be useful to get a financial adviser to review everything for you.

If you have a financial adviser, then they can keep a watchful eye on your investments for you. They will explain to you how they’ll manage this as well as agreeing with you how often they’ll review your overall retirement plan to check it still meets your needs. 

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impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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