Best Tips for Retirement Investing

If you’re retired or approaching retirement, you might be thinking about retirement investments. If you have a pension pot — which most individuals who have been employed in their lifetime will have — then you’ve likely been an investor all your working life. The contributions made to your pension fund, whether that’s by you and/or your employer, will accumulate over time, giving you a pot for your retirement.

But what about after you’ve stopped working? What do you do with this retirement pot? What are some of the best investments for retirement? And what are some top tips for smart retirement investment?

Do I need to invest to retire?

If you have a pension pot then you have made investments for your retirement, whether you realise it or not. However, this is not a necessity in order to retire, as long as you have made enough national insurance contributions and have worked throughout your life, then you will also receive a state pension. This allows you to retire from age 66 (although this is set to rise to 67 for those born on or after April 1960 and rises again to 68 between 2044 and 2046 for those born on or after April 1977).

If you plan on retiring earlier than 66, or indeed, if you want a pension which will afford you a higher standard of living, then it’s recommended that you invest and save as much as you can for your retirement.

How should I invest when I retire?

If you decide to invest during your retirement, there are several different ways you can do so. One of the main investment strategies used by those in retirement is a drawdown scheme. This provides your pension income but retains leftover funds within the invested pension scheme to generate future growth. Alternatively, you can invest your pension income actively meaning regularly moving money to try and get the best returns. This is particularly relevant if you receive your income via an annuity and want to try and stretch your funds a little further. Below we’ll take you through both these options in more detail.

Drawdown scheme

When you make contributions to your pension pot, the money is invested as a means to provide long-term growth. When you reach retirement and want to withdraw from your pension, you may opt to keep funds invested in the stock market and then draw your income from it. This is known as the drawdown approach. 

With drawdown, you are not just investing for long-term growth, but also for more immediate income. This involves a tailored approach to the stock market which include assets which offer stable growth and come with lower risk. This is key because if your drawdown fund depreciates too much while you’re withdrawing your pension from it, it becomes very hard to recover any losses when they occur.

If you want to pursue a drawdown scheme, it’s important that you speak to a financial adviser that can point you in the direction of a pension provider which can offer you a scheme suited to your retirement plan and goals.

Bear in mind that with drawdown, you are still an investor and at the mercy of the stock market to determine your future income. Since stock market crashes do occur as a result of unforeseen circumstances (for example, pandemics, wars and economic sanctions), you are  vulnerable to losing money. If you don’t have an alternative source of income, this can be a serious issue.

Investing your pension income

Another way to invest during retirement is by using some of your leftover income to purchase assets that you can make a return on. This will work in much the same ways as investing at any other time of life, except for the fact that you may have less disposable income available to you, so can withstand fewer risks.

When you access your pension, which is currently possible from age 55, you have the option to take 25% from the pot tax-free as a lump sum. If you decide to do this and have no particular plans with it, investing it can be a great option.

Investing can also be on the table if you draw your pension via an annuity instead of a drawdown. While it is possible to invest leftover income from drawdown, it doesn’t offer much financial advantage, so you may as well only draw down what you need. This is because you will be taxed on your annual income, so it’s smarter to only take out the amount of money you require. With an annuity, you receive a fixed amount. This is taxed too, but if you happen to have money left over you can’t reduce the tax by reducing the pension you receive, so the tax won’t change if you use it to invest.

Top tips for retirement investing

If you do decide retirement investing is something you want to pursue, then there are certain considerations you should bear in mind. These are outlined below:

Know why you want to invest

It helps to know your ‘why’ when it comes to investing in retirement. Do you want to supplement your future income? Or do you have a particular financial goal you want to work towards, like helping your children to buy their first property? Or perhaps you just relish the challenge? Knowing what you’re hoping to achieve will help inform your strategy.

Know the risks

Investment portfolios can consist of different types of investments, including equities, bonds, commodities and cash. These are all different asset classes, and each comes with its own set of investment risks. In order to know what kind of investments to pursue, you need to know your ‘risk appetite’, or ‘risk tolerance’, which is essentially the amount you can afford to lose. A financial adviser will be able to help you work out what your risk appetite is and advise you accordingly.

Seek out financial advice

Unless you have a solid background in investments prior to retirement, you should greatly benefit from receiving financial advice from an expert. A good financial expert will be able to look at the whole financial picture and create an effective investment approach for you. Even if you’re just looking into investments as a hobby, you will likely see far greater outcomes if you seek out unbiased, professional advice.

Make withdrawals with tax in mind

When you come to cash-in your investments, which you are likely to do at regular intervals, make sure you’re aware of the tax you are liable to pay and the various ways you can minimise this.  For example, growth on investments is liable for capital gains tax (CGT). Note, however, that you have a CGT allowance (£12,300 for the 2022-23 tax year) meaning that you will not pay tax on gains lower than this threshold.

CGT is also currently lower than income tax. This means it can be beneficial to draw money from investments rather than your drawdown scheme. Any CGT you have to pay would be only 10% (for basic rate tax) or 20% (higher rate), compared to 20% or 40% income tax on the drawdown money.

So, in summary, there are two main ways to invest during retirement:

  • Using a drawdown scheme
  • Investing your pension income

Some of our best tips for successful retirement investing include:

  • Having a clear idea of your goals
  • Being aware of the risks involved
  • Seeking out expert financial advice
  • Be tax-efficient when making withdrawals

How we can help

If you’d like to discuss your options for retirement investment with our financial advisers, get in touch for a free initial consultation.

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Please note: A pension is a long term investment, the value of investments can fall as well as rise. You may not get back what you invest. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. This article is for information purposes only and does not constitute personalised advice.

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