Final salary workplace pensions are slowly becoming a thing of the past, according to figures from the PPF (Pension Protection Fund) and the Pension Regulator, with only 1,013 of the UK’s 6,400 schemes still open to employees.

As a result, more people are having to provide for themselves in the run-up to retirement and during retirement, whether that means building a pot of money or buying an annuity from which they can pay themselves a guaranteed income for life.

Annuities are a popular option: according to the (ABI) Association of British Insurers the number of pension annuity contracts jumped 24% last year to 89,600 reaching a new 10-year high.

The latest pension annuity data from the ABI shows total annuity sales reached £7 billion last year, a 34% increase on 2023.

There are other options for people with the introduction of new pension freedoms in 2015, such as entering drawdown at aged 55 or over and staying invested in the stock market.

Many people will still look to switch their portfolio towards income eventually as they will have outgoings like utility bills, grocery shopping or mortgage payments, and they will use their accrued pension pot to do this.

With this in mind, how should you think about balancing growth and income in the run-up to and once you are in retirement?

HOW MUCH INCOME SHOULD I AIM FOR?

The amount of income you should aim for in retirement varies depending on what sort of lifestyle you want in later life.

The PLSA (Pensions and Lifetime Savings Association) gives some rough figures for the amount of retirement income needed depending on what lifestyle you want to live – minimum, moderate or comfortable.

A minimum living standard in retirement is based on spending £50 per week on groceries, £10 per week on taxis (not having a car) and £100 per year on rail fares.

A moderate living standard is based on spending £55 per week on groceries, owning a three-year old small car replaced every seven years, and taking a three-star all-inclusive holiday in the Mediterranean plus a long weekend break in the UK.

When do people retire?

The UK the state pension age is currently 66 for both men and women increasing to 67 for those born on or after April 1960.

You can access workplace or private pensions from the age of 55, increasing to 57 from April 2028. This is often seen as early retirement.

A comfortable living standard is based on spending £70 per week on groceries, up to £1,500 on clothing and footwear each year and taking a two-week four-star holiday in the Mediterranean with spending money plus three long weekend breaks in the UK.

A minimum living standard would require an income of £14,400 per year for a single person and £22,400 for a couple, while for a moderate living standard a single person would need £31,300 and a couple would need £43,100 per year.

For a comfortable retirement, a single person in the UK would need an annual income of around £43,100 while a couple would need around £59,000.

Other factors affecting retirement income needs include where you live, as in a big city like London living expenses may be considerably higher than in the suburbs.

Your health may also affect retirement income needs, as you may have one-off unexpected health costs or need to factor in long-term care if you have a terminal illness.

Finally, your housing situation is important, whether you are a homeowner, whether you have a mortgage, or whether you rent.

WHAT SHOULD MY INVESTMENT STRATEGY BE?

It is important to remember when investing in later life to think about the long term.

Your pension pot may need to provide you with growth and an income for over 30 years, and ideally should generate enough income to preserve your capital.

Also, when choosing what to invest in you need to think about your risk threshold.

Ask yourself what level of risk are you willing to take – are you low-, moderate- or high-risk with your investment style?

Philip Hanley, founder, director and principal adviser of Philip James Financial Services, says: ‘We tell our clients to achieve a decent pension income in retirement for the long term, to leave it invested in reputable low-cost managed funds. Looking at our clients, we have most of them invested in medium-risk and balanced funds.’

Hanley acknowledges everyone is different when it comes to retirement, and it very much depends on circumstance, so there is no universal solution.

‘Few people can afford to retire bang on 55 or 60 years old. Most people wait until state pension age to retire and slow down around the 55 or 60-year mark, then look to supplement their retirement income in the form of investments, tax-free income and savings which have been invested.’

WHAT ARE THE COMMON MISTAKES?

Darius McDermott, managing director of Chelsea Financial Services, says one of the biggest mistakes people make when managing their portfolios is over-loading on income-producing assets or withdrawing too much cash.

‘The reality is most people need their retirement savings to last at least 20 years, and prioritising income at the expense of growth can be risky. Even moderate inflation of 3% to 4% per year can significantly erode the real value of your savings if they’re locked in low-growth income assets. As inflation chips away at your purchasing power, maintaining your desired standard of living becomes harder, increasing the risk of running out of money too soon.

‘There’s no one-size-fits-all approach to building the perfect retirement fund, but a well-diversified portfolio that balances growth and income is generally more sustainable than an income-only strategy.

‘Your approach should depend on factors like health, life expectancy and overall wealth. The longer your investment horizon - or the more financial flexibility you have - the more you can afford to allocate toward higher-growth assets to ensure long-term financial security. As you age, gradually increasing the income portion of your portfolio is a sensible move.’

In terms of what type of financial products to invest in, McDermott told Shares: ‘Bonds offer a steady, predetermined stream of income, which has made them a staple of retirement portfolios. Specialist funds like BlueBay Investment Grade Global Government Bond (B4ZG8G2) provide a stable income stream and serve as a hedge during equity market downturns.’

McDermott also flagged diversified global equity income funds like TM Redwheel Global Equity Income (BMBQN67), which aims to provide a combination of income and capital growth over five-year rolling periods by investing in a concentrated portfolio of global companies.

There is also Murray International Trust (MYI), which aims to achieve an above-average dividend yield with long-term growth in dividends and capital ahead of inflation, while on the multi-asset side there are BNY Mellon Multi-Asset Balanced (B01XJG6) and Liontrust Sustainable Future Managed (B8FDBQ2).

‘There are also targeted absolute-return funds which focus on capital preservation by minimising losses during downturns while delivering steady, modest returns in rising markets,’ says McDermott.

A BALANCED APPROACH

Whatever you do, chartered financial planner Lena Patel believes you should, first and foremost strike the right balance: ‘To ensure financial security while maintaining flexibility, a well-planned withdrawal strategy is a key component of a successful retirement plan.’

Patel adds: ‘A common mistake is prioritising income over growth too early. While income-generating assets such as bonds and dividend-paying stocks provide stability, relying too heavily on them can restrict long-term portfolio growth.’

It is also important to regularly review and adjust your portfolio to ensure it remains aligned with your financial plan throughout retirement.

Below are four more fund ideas, two for growth and two for income, to help with a balanced investment approach.

Royal London Global Equity Select (BF93W97) Price: 285p

The fund’s objective is to achieve capital growth over the long term, and it certainly seems to have done that. Over the last five years it has generated a 144% return thanks to investments in global blue-chips such as Alphabet (GOOG:NASDAQ), Amazon (AMZN:NASDAQ) and Microsoft (MSFT:NASDAQ).

The focus on capital growth means the fund has a miserly dividend yield of 0.51%, while the ongoing charge of 0.71% per year is very reasonable given the performance.

Artemis Global Income (B5ZX1M7)

Price: 267p

For an income fund, a five-year return of 116% is pretty impressive in our book. Major holdings include Asia-focused bank HSBC (HSBA), defence stocks Bae Systems (BA.) and Rheinmetall (RHM:ETR) and US bank Wells Fargo (WFC:NYSE).

The dividend yield is 2.79% and the ongoing charge fee is 0.87%.

Invesco Global ex-UK (B1C41T2)

Price: 539p

This is another fund which aims to achieve long-term capital growth, but as its name implies it invests in shares globally outside the UK. Over five years it has returned 122% thanks to holding stocks such as Apple (AAPL:NASDAQ), Microsoft and Nvidia (NVDA).

The fund doesn’t pay a dividend and the ongoing charge is 0.7% per year.

TM Redwheel UK Equity Income (BG342C6)

Price: 129p

This fund aims to deliver a dividend yield in excess of the FTSE All Share index while providing long-term capital growth, and it looks have done that with a return of 82.6% over the last five years.

Top holdings include high-street bank Barclays (BARC), oil giant BP (BP.) and on-the-up retailer Marks & Spencer (MKS), while the yield is 3.4% and the ongoing charge is 0.79%. 

DISCLAIMER: Sabuhi Gard owns shares in HSBC and BP.

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