Investing near and after retirement

There are clear goals when you’re either saving up for retirement or are in it. When you’re building your pension up, you want investments to grow. Once in retirement, for most people, the goal is to generate income.

So, how do you adjust your approach to investing close to retirement? It may be helpful to consider the following questions.

Six considerations for investing in retirement

1. Are you thinking long term?

In the past, investing in later life was all about reducing risk and converting investments into cash before buying an annuity. While you can still choose to buy an annuity, other approaches are now available.

If you want to keep your pension pot invested to take an income via drawdown or pension lump sums, you need to think longer term. Your pension pot may need to provide you with an income for 30+ years, which means it should ideally generate income while preserving your capital.

2. How do you plan to use your pension?

How you invest later in life will depend on how you’ll use your pension. Will your pension be:  

• Your main source of regular income
• Used to provide for one-off expenses
• Left to provide for your family when you die
• Or a mixture of all of these?

3. What level of risk are you willing to take?

When choosing investments, you also need to consider the possible risks and how a downward turn in the market could impact your retirement income.

During the financial crisis, the typical global equity fund fell by 30%. That’s not something you want to happen just at the point you’re about to draw your pension. Therefore, you want to protect your pension from big market downdrafts. But at the same time, you’ll still want to experience some growth in your pension in your final years of working, as well as preparing to draw an income in retirement.

The usual principles of investing – a well-diversified portfolio, with a range of assets, geographical areas and sectors – will help you weather most storms.

4. When should you adjust your investment strategy ahead of retirement?

If you’re going to transition your investment strategy in the approach to retirement, you also need to decide when to start the switch.

There’s no hard and fast answer, but conducting a pension review 10 years before retirement is normally a good idea. You can check if you’re on course to meet your retirement goals and consider your investment strategy going forward.

By the time you hit five years to retirement, you should really be starting to transition your investment strategy if you haven’t already.

Giving yourself more time allows you to adjust to market conditions. If there’s a big drop in share prices, you can delay shifting out of equities until there’s some recovery, provided you haven’t boxed yourself in by leaving things until the last minute.

5. Do you have multiple pension pots?

It’s quite common to accumulate multiple pots spread across different providers. It can be hard to implement a joined-up investment strategy across many different pensions. If you want a helping hand, you can always seek out the services of a professional financial adviser who, for a fee, will provide recommendations tailored to your personal circumstances.

6. Have you done your research?

Remember to always research investments thoroughly and never feel rushed or manipulated into making decisions. Your pension is one of your most valuable assets. You should always be wary of pension fraud.

How to invest as you approach retirement

What is ‘lifestyling’?

The traditional approach to investing as you prepare for retirement is called lifestyling. As you approach your chosen retirement date, your assets are gradually moved out of equities and into bonds, in order to hedge against annuity rate movements.

Bond prices move in the opposite direction to annuity rates, and so the idea is by investing in these ‘annuity hedging’ funds, you can reduce your retirement income volatility.

While that might be true if you’re buying an annuity with your pension pot, this doesn’t actually reflect what most people are doing with their pension. Only around 10% of people are currently buying an annuity with their pension, compared to around 90% before the pension freedoms were introduced almost a decade ago.

This opens investors up to a big risk. Over the course of 2024, the typical annuity hedging fund used as part of a lifestyling strategy fell in value by over 8%. In 2022, it was as much as 36% in a year.

Annuity rates went up at the same time, but if you’re not buying an annuity, that 36% decline represents a pension hit every bit as bad as being invested in a global equity fund during the financial crisis.

Is lifestyling an outdated strategy?

For many, the traditional lifestyling approach is now an inadequate, outdated strategy. Nonetheless, many older pensions, such as group personal pensions or individual personal pensions, still automatically implement a lifestyling approach on behalf of investors.

If you have an older pension, typically provided by an insurance company, you might want to check if it’s programmed to start investing in annuity hedging funds as you get closer to retirement.

What the widespread failure of traditional lifestyling throws into focus is that to plan an investment strategy that leads into retirement, you need to think about how you’re going to draw your pension when the time comes.

If you’re one of the minority of people who are planning on buying an annuity, the traditional lifestyling approach might well work for you. But many more people are now taking the two other options opened up by the pension freedoms: cash lump sums and drawdown.

Converting a pension into a cash lump sum

For those who are taking their entire pension as a cash lump sum it makes sense to have their pot held in cash, or cash-like money market funds, as they approach retirement. This protects them from large market falls just as they are about to cash in their chips.

One of the things we can salvage from the traditional lifestyling approach is the idea of a gradual shift in your assets as you approach retirement. This helps smooth the journey and means you aren’t caught out by a big market repricing, just as you leap from one investment to another.

For those taking their entire pension as cash, this would mean slowly shifting towards having 100% of your pension held in cash. 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.

Read about tax on pension withdrawals

Entering into drawdown

For those taking drawdown, where you keep your pension fund invested in retirement and take an income from it, the thinking cap probably needs to stay on for a bit longer.

While it still may be prudent to gradually shift your pension pot, the question of what you are moving towards depends on your risk appetite and how you want to invest in retirement.

It’s perhaps a good idea to put together a target portfolio, which is how you want your pension to look at the point of retirement, and steadily move your investments across to the new strategy.

You might end up keeping some of your holdings. That’s because you’ll almost certainly want to retain some exposure to shares in a drawdown account, though most likely with a greater focus on income rather than growth.

Even so, you may still want to hang on to some more growth-orientated shares and funds in the interests of having a diversified portfolio, and you can always generate an artificial income from these assets by taking profits and withdrawing the proceeds.

Read more about drawdown

Investing when retired: what are the options?

When you reach retirement age, you’ll likely need your pension pot to generate cash – so you can take an income, be it regularly or as needed.

How to generate cash to pay your pension income

You can generate cash by selling investments, or by buying income-paying shares or funds.

Corporate bonds and equity income funds might be worth considering. You could also invest in the ‘income’ units of funds rather than the ‘accumulation’ units. Income units pay any dividends or interest generated by the fund out to you in cash, while accumulation units reinvest it.

If you depend on a regular income, it may be a good idea to always keep some of your portfolio in cash. That way you won’t be forced to sell investments when markets are low. Although, remaining in cash will give a poor return, especially in times of higher inflation.

Get help investing for an income

Finding income-paying investments for your retirement can be hard, but we can help. Our investment ideas can make investing easier after retirement, as each one has income-paying options. Simply choose the idea that suits you and your retirement goals.

How to invest in drawdown

When you put your pension pot into drawdown, you don't have to do it alone. We'll offer you Investment Pathways, which lets you choose between four main retirement goals. You'll then be able to invest your pot in a fund designed to broadly match that goal.

Investment Pathways are completely optional. If you prefer, you can choose your own investments or keep your portfolio as it is.

Learn more about Investment Pathways

Pension drawdown

The flexible way to access your pension – you choose how to invest it, what income to take, and when.

Learn more about drawdown

Options at retirement

You've saved hard for your retirement, but once you get there, what do you do next?

See retirement options