Investing in retirement - six things you need to know

As you move into your 50s, 60s and beyond, your relationship with investing will naturally change. You may be thinking more about accessing your pension and generating an income or making sure you don’t outlive your pensions and other savings in later life.

While there’s plenty of change ahead - and hopefully some exciting plans - your investment decisions still matter just as much as they did during your working years. Whether you’re approaching, at, or already in retirement, here are six key investment considerations.

1. How do you plan to use your pension?

Although this isn’t the only way you can fund your retirement, how you invest later in life will largely depend on how you’ll use your pension.

Do you plan to:

• Take cash in chunks;
• Move into drawdown and keeping your money invested;
• Buy an annuity for a guaranteed income;
• Or a mixture?

It’s a big decision, so it’s worth getting some guidance or formal advice. Once you’ve reached age 50, you can access the government’s free Pension Wise service. But if you’d like to know what option is best for your own specific circumstances, you should seek advice from a suitably qualified financial adviser.

2. Are you thinking long term?

One of the biggest risks in retirement is that you outlive your money.

A 65-year-old today has a good chance of living into their late 80s or beyond. For couples, the odds of one partner reaching their 90s are significant.

The traditional assumption that people should move out of investments into cash to buy an annuity no longer reflects what most people are doing with their pension. Only around 10% of people accessing their pension for the first time are currently buying an annuity with their retirement pot, despite rising rates.

If you’re considering a more flexible income option, you’ll certainly need to think long term. Your savings may need to provide you with an income for 30-plus years, which means your investment portfolio should ideally be positioned to generate income while preserving your capital.

3. Don’t underestimate inflation

Even modest inflation can significantly reduce what your money can buy over time. Even at an inflation rate of 2.5%, prices roughly double over 28 years.

Inflation can hit harder in retirement as you’re likely to be spending more than younger generations on goods and services such as energy, food and healthcare, which typically rise in price faster than the headline rate.

4. Get the balance right on investment risk

There’s a common assumption that everyone should move into cash or low-risk assets as they approach retirement, but the reality is more nuanced.

There’s a balancing act between taking too much risk, where a short-term market blip might cause you to cash out and derail your plans, and taking too little risk, with the net result that your money doesn’t last as long as you need it too.

If you’re planning to withdraw your whole pension as a cash lump sum, then it makes sense to transition your pot to cash, or cash-like money market funds, to protect you from large market falls just as you’re about to make that move.

Even for those buying an annuity or taking drawdown, building up some cash makes sense if you’re planning to take your 25% tax-free lump sum at retirement.

In any case, a gradual shift in your assets as you approach retirement will help smooth the journey. Giving yourself more time allows you to adjust to market conditions. A short-term correction might mean you want to delay shifting out of equities until there’s some recovery, if you haven’t left things until the last minute.

If you’re planning to stay in drawdown, you might end up keeping most of your holdings. You’ll almost certainly want to retain some exposure to stock markets, although your focus might tilt towards income rather than simply growth.

Retirement doesn’t remove the need to spread your investments. The usual principles of investing – a well-diversified portfolio, with a range of assets, geographical areas and sectors – will help you stay the course and should help you weather most market backdrops.

Keeping growth-orientated shares and funds will help you maintain a diversified portfolio, and you can always generate ‘income’ from these assets by taking profits and withdrawing the proceeds.

If you got an idea of what you want your pension to look like at the point of retirement and steadily move your investments across to the new strategy.

5. Consider a cash buffer against sequencing risk

If you’re considering drawdown and keeping your pot invested, you also need to consider how a downward turn in the market could impact your retirement income.

Sequence risk is the danger of taking income from your investments when markets are falling. Withdrawals during a downturn can lock in losses and make it harder for your portfolio to recover.

One way to manage this is to set up a cash buffer or ladder for planned withdrawals over the short to medium term. If you can use this to fund your spending, particularly in market dips, you can give your invested portfolio time to recover before drawing from it again.

6. Tax in retirement still matters

Just because you’ve stopped working doesn’t mean tax stops being something to keep in mind.

When the time comes, it’s worth having an eye on the way different income sources are taxed. By understanding how your tax-free allowances work for pensions and income generally, you can make your wealth last longer through retirement and keep more of what you draw.

When it comes to pensions, you can usually take up to 25% of the value tax-free (subject to an overall lump sum allowance of £268,275) with withdrawals above this level subject to income tax at your marginal rate.

Most people still like to take their maximum lump sum when they come to access their pension, but you don’t have to take it all at once. Unless you have big plans for the lump sum right away, or you’re looking to use the rest of your pot to buy an annuity, it might not be the most tax efficient move for you overall.

If you move into drawdown, you can take income as and when you want to. You could take nothing to start with, or withdraw smaller amounts to keep you within your current tax band. When you first take a taxable income payment from your pension, you may have to deduct income tax using an emergency tax code. Learn more about how to reclaim this from HMRC.