How to invest during retirement to protect your pension pot

Should you invest during your retirement? If you have a pension pot (rather than a final salary workplace pension) then you’ll have been an investor all your working life – even if you weren’t aware of it.

The investments in your pension fund will have built up over time to provide you with an income when you retire.

But what about after retirement?

Well, depending on how you choose to take your pension, you may continue to be an investor via your pension fund. Or you might choose to invest some of your pension income for a rainy day.

Here you can find out more about investing in retirement.

What are the different types of investments for retirement?

When we talk about ‘investing in retirement’, we might mean either of two very different things.

If you were to use a drawdown scheme to provide your pension income, this would be invested in a fund to generate ongoing growth – that’s one type of investment.

However, you might also decide to invest some of your pension income actively – particularly if you were taking your income via an annuity and wanted to try and make it go further.

We’ll consider both these approaches in more detail.

How do you invest with your drawdown scheme?

When you’re saving up your pension pot, the money is invested in a fund designed to provide long-term growth. When you come to take your pension pot, you may decide to keep it invested in the stock market and draw an income from it over the years.

However, this approach – known as drawdown – requires a different investment strategy from saving up a pension pot.

Here, you are not investing for long-term growth but for income. Investing for income generally means trying to choose assets that provide more stable growth and are less vulnerable to dips in the stock market.

This is important, because if your drawdown fund loses too much value and you continue to make withdrawals from it, it will be much harder for it to recover its losses when the stock market rises again.

So how do you choose the right assets? Fortunately, a financial adviser will arrange this for you.

Pension providers offer ready-made drawdown funds to suit a variety of retirement lifestyles, and your financial adviser will be able to recommend the best ones for your needs.

The important thing to remember with drawdown is that you are still an investor, relying (perhaps entirely) on the stock market for your future income.

Stock market crashes can and do happen, particularly in response to unforeseen events like COVID-19.

If your fund is hit hard by a dip, do you have other sources of income you can use while it recovers? These are the sorts of things that you should discuss with your IFA.

How do you invest your pension income?

The other way you might invest in retirement is the standard approach: using some of your spare income to buy assets that you hope will generate a return.

How you do this will be much the same as investing at any time of life – but with the added caveat that your disposable income may be lower, so you may not be able to take as much risk.

When you access your pension (which you can do from the age of 55, although this is rising in the future) you have the option of taking 25% of the pot as a tax-free lump sum.

Most people do this, since there is no real disadvantage to doing so (other than the temptation to spend it). If you don’t want to spend it right away, then investing it may be a very sensible option.

Investment may also be an option if you take most of your pension income via an annuity rather than drawdown.

Why should you not use a drawdown scheme for income?

There is nothing to prevent you from investing drawdown income in other assets of your choice. But broadly speaking, you are less likely to gain many advantages in this way.

With drawdown, it’s best to take out only as much income as you need to spend, as it will be taxed. So, if you take out extra income to invest, you’ll pay additional tax, possibly offsetting any investment gains you might make.

With an annuity, on the other hand, you receive a regular, fixed amount. This will be taxed, but if you have more money than you need to spend, it may be worth investing some of it.

1. Decide why you want to invest in retirement

Make sure you know your own reason for investing.

Is it to supplement your income in the future – perhaps for when you may need long-term care? Is it for a particular goal, such as a dream holiday or to help children onto the property ladder? Or is it simply because you enjoy the challenge, or want to leave more of a legacy for your family?

Knowing your goals will help you determine your investment strategy.

2. Understand your risk appetite for retirement investments

Typically, an investment portfolio is made up of different types of investments, including equities, bonds, commodities or unit trusts. These are known as asset classes. Each can be rewarding, but you have to be willing to accept the investment risks and know your limits.

A financial adviser will help you to work out your risk appetite (also known as risk tolerance). This may not be as you expect: you might be much more (or less) able to withstand risk than you think.

Remember, there are also risks involved in not investing – such as cash losing value over time due to inflation. Always factor these in when weighing up your options. Keeping large sums in a low-interest cash account isn’t always as ‘safe’ an option as it looks.

3. Pick asset classes that align with your risk appetite and income goals

With your risk appetite assessed and marked as low, medium or high, you can now build your investment portfolio.

As mentioned, there are lots of options to consider, from offshore investments to ethical investments and alternative investments like physical objects (wine, antiques etc.). What you choose depends on your goals and risk limits.

Learn more: how to invest in wine

It’s good practice to build a diverse investment portfolio, including assets classed as high, medium and low-risk. High risk assets generate most of the growth, while the lower-risk assets cushion you against losses.

4. Seek independent financial advice

Seeing a financial adviser is crucial if you plan to invest retirement income.

Firstly, there may be practical aspects of your lifestyle that you have not yet considered, which may influence your investment strategy.

An financial adviser is trained to probe into your finances as a whole, and so recommend the best approach for you personally. They may even recommend that investing is not the best avenue for you after all. You don’t have to agree, but their unbiased opinion is worth having.

Secondly, an adviser can help you choose the best asset classes and recommend the best funds available for your needs. Unless you want to, you won’t have to invest from scratch, picking individual stocks – your IFA can select suitable products from the whole of the market.

Thirdly, your financial adviser can handle as much of the investment admin as you need. Some people enjoy this side of things and like to play an active part in their investments – if this is you, then it’s a stimulating way to spend some of your free time. Most people, however, lack the level of experience to manage their own investments confidently, so are happier to leave it to their adviser.

5. Withdraw from your portfolio in a tax-efficient way

When the time comes to cash in your investments, which you might do at regular intervals or at the end of your investment term, you will need to consider tax.

Growth on investments is subject to capital gains tax (CGT), so you may sometimes have to act carefully to avoid losing more than necessary.

Everyone has a CGT allowance (£3,000 for the 2024-25 tax year and £1,500 for trusts) so if the growth on the investments that you cash in is lower than this, there will be no tax to pay.

It’s also worth noting that CGT is lower than income tax, so in some cases it may be more tax efficient to take money from investments rather than your drawdown fund, if you are in a position to do so.

For example, if you invested your original tax-free lump sum at the start of your retirement, then set up a drawdown scheme, you could save tax by taking less from the drawdown scheme (perhaps even staying under your personal allowance) and taking the rest from your investment.

Any CGT you had to pay would be only 10% (for basic rate tax) or 20% (higher rate), compared to 20%, 40% or 45% income tax on the drawdown money.

There are many ways in which investment can make your money go further in retirement. Talk to your IFA about which options suit you best.

Get expert financial advice

Investing during retirement can be a smart way to enhance your pension income, but it's essential to have a clear strategy that aligns with your financial goals and risk tolerance.

Whether you are investing through a drawdown scheme or using surplus income to build a portfolio, seeking guidance from a financial adviser can help you make informed decisions and navigate potential tax implications.

With careful planning, you could potentially maximise your returns and ensure your retirement savings work harder for you.

Unbiased can quickly match you with a financial adviser for expert financial advice to ensure you have the right support and help you optimise your investments and manage your pension pot effectively throughout your retirement.

If you found this article interesting, you might also find our article on pension vs property investments informative, too.