Today, savers reaching retirement have more choices than ever before about how they use their pension pots to fund their retirement.
Instead of simply using their pension money to buy an annuity that provides a guaranteed income for life, many choose to invest throughout their retirement years. The challenge this brings is to deliver a continuing income, while ensuring they don’t run out of funds later in life.
A growing number of retirees are choosing to go into pension income drawdown, where their pension pot is invested and they take an income from it. Those who choose to invest will need to consider some practical points, such as whether they would like a fixed amount each month, or prefer to access ad hoc amounts as and when they need them. It’s also important for investors to consider how much risk they are happy to take with their money.
Investing means introducing risk to your money. Being prepared to assume a certain degree of risk can help you grow your cash. Conversely, there is of course the possibility that you could lose some, or all of your money. Stock market performance is unpredictable. Investing is all about adopting a longer-term view, diversifying risk, and giving your money time to grow.
The key for drawdown investors is to build a diversified portfolio of funds which aims to produce a reliable dividend yield, without taking undue amounts of risk. In practical terms, this means investing across a range of sectors and stock markets to spread the risk. That way, a poorly-performing investment should not greatly damage your overall returns, and your money has greater opportunities for growth. A portfolio that includes a combination of different assets has been shown historically to perform better than one that is only invested in one type of asset.
The process of deciding where to invest your money is referred to as asset allocation. The main categories of assets are cash, equities, bonds and property, and each has its own risk profile. Once your portfolio is established, it’s important to schedule regular reviews so that your investments can, if necessary, be altered or re-balanced in response to economic and market forces.