After years of hard work, you’ll want to retire to a healthy pension pot when the time comes. To do that, you need to think about how you invest your remaining savings once you start withdrawing money.
Investing in retirement requires a new approach and some careful planning. After all, your goal up until now was to grow your savings — now, you need to maintain them to meet your new financial goals, and protect them against drops in value.
Here are some of the main points to think about.
Manage your pension pot
When you start using your pension savings, your pension provider will usually ask you about how you want to invest your remaining pot.
This might include choosing your own investments, or selecting from some ready-made investment options. You can also speak to a financial adviser to help you choose — generally speaking, it’s always best to seek advice from a qualified professional.
To help you decide how you’ll invest your savings, it’s a good idea to assess your financial position. Think about how much you have in your pension at the moment, and how much you’re likely to need throughout the course of your retirement: are your current savings enough to cover you?
You should set yourself a limit to the amount you take out each year, and review your situation regularly in case circumstances change.
It’s also important to consider the various risks that could affect your pension investments:
- Losses: Any investment can rise and fall, so you’ll need to consider both the level of risk you’re comfortable with, and your capacity to withstand financial losses.
- Inflation: This erodes the value of your savings over time, decreasing your buying power.
- Running out of income: If you spend more than expected — or live longer than expected — there’s a risk you could run out of savings. It’s important to plan with this in mind.
Choosing your investments is often about balancing all of these risks. Again, this is where a professional can help.
Watch out for tax charges
When you start withdrawing from your pension, there are some tax rules to be aware of. These can get complicated, but for the most part, your retirement income is taxed in the same way as any other income you’ve earned.
You do have the option to take a tax-free lump sum, however, of up to 25% of the amount you’ve built up.
You should also be aware that taking money from your pension will trigger something called the money purchase annual allowance (MPAA). This replaces your standard allowance for the amount of tax-free pension contributions you can make in a tax year.
In 2023/24, the standard pensions annual allowance is £60,000 — but if you trigger the MPAA, it drops to £10,000.
We’ve summarised these tax rules very briefly here, but there’s a lot more to be aware of if you’re planning your pension withdrawals. Talk to us for the full picture.
Plan for the future
As well as thinking about covering the costs of your retirement, you should consider long-term costs when making your investment decisions.
You should factor in any medical or social care you might need, for instance, and provide for your family at the end of your life.
Considering estate planning alongside your pension planning will help you to create a strategy that sees you through a comfortable retirement, as well as making sure your loved ones are well looked after in the future.
Get in touch for advice on investing in retirement.