The standard approach to retirement planning has typically been to mainly invest in funds that invest in shares while you’re young. Then as you get closer to retirement, to gradually de-risk your portfolio by choosing funds that invest in a mixture of investments including bonds, as well as cash.
Lifestyling
The idea is to benefit from the long-term investment returns that tend to come from shares, to build up your pension. This is while also giving yourself time to hopefully ride out the ups and downs that come with investing in the stock market though of course nothing is guaranteed. Then, over time, the shift into bonds and cash can offer more shelter in the lead up to retirement.
This process is known as lifestyling and is usually something to start looking at five to ten years before your chosen retirement date.
A steady shift from shares to bonds the closer you get to retirement is a principle that underpins the strategies of most default pension funds.
In 2020, on average, default investment strategies (in master trusts) allocated more than two thirds (69%) of assets to shares 20 years before retirement.
Annuities
An annuity is a type of retirement income product that you can buy with some, or all, of your pension. It pays a regular taxable income guaranteed for life, plus an optional beneficiary pay-out.
Often criticised in the past for providing poor value for money, annuity incomes have increased rapidly recently – up well over 40% in the last two years alone.
Rising government bond (gilt) yields and a hike in interest rates have raised annuity incomes significantly. With the possibility of more interest rate increases on the horizon, there’s a chance these incomes could go even higher.
Annuities How Much
A 65-year old with a £100,000 pension could now get £7,144 each year compared to £5,940 a year ago on a five-year guaranteed single life, non-increasing income annuity.
Annuities look a lot more attractive now than they have over the last couple of years. However, many are concerned about locking into an annuity rate now and potentially missing out on higher rates in the future.
It’s worth noting that waiting for a higher annuity rate would also mean missing out on those income payments you would get in the meantime. Maybe even missing more than you would have gained from a potentially higher rate.
But remember, there’s no obligation to buy an annuity with all of your pension on one day.
You can choose to buy smaller annuities over time throughout your retirement. That way you can secure a guaranteed income to meet your needs as you go along, while leaving the rest invested in the stock market with the potential to grow further if you are happy with this level of risk.
This lets you potentially benefit from higher annuity rates as you age.
You could also qualify for a further boost to your income through an enhanced annuity depending on your health and lifestyle. It’s worth taking the time to enter these details when getting an annuity quote.
Drawdown
Drawdown has become an increasingly popular choice for people who want to access their retirement savings. It lets you keep your pension invested how and where you choose and make withdrawals when you need to.
This brings into question whether traditional lifestyling strategies work for people in, or planning to use, income drawdown.
If you want to stay invested in retirement and take an income, is a strategy that switches you from shares to bonds in the run up to retirement the right option?
At that point in retirement planning, you’re more likely to want to stay largely in shares to help generate the returns to take an income over the long term.
It’s important that retirees looking to remain in income drawdown are aware of their investment strategy in the years running up to retirement. That’s so you can make sure it meets your needs and you don’t need to make any potentially painful last-minute changes.
One approach to taking an income through drawdown is to take a natural yield. This is where you only take the level of income generated by your investments. This means you’re not touching the capital, so your pension income is more likely to be sustainable long term.
To ensure you are optimising your personal pension in 2023, talk to one of our FCA authorised wealth managers by arranging a Discovery Call [Here]
This article is for informational purpose only. It does not constitute finacial, tax or legal advice, nor is it a recommendation to buy, sell or hold any investment. Past performance is not a guide to the future, investments rise and fall so investors could make a loss. No view is given on the present, future value or price of any investment and investors should form their own view on any proposed investment.