Pensioners are first-time investors

Almost half a million retired people have put their pension into income drawdown since pension freedoms were introduced. But new research reveals a third of adults in drawdown have never invested in the stock market before – with two in five (41%) not getting advice or guidance. This combination could have a detrimental effect on finances in retirement if poor investment choices are made.

The income you have to live on in retirement will be dictated by the success of the investments you make and the funds you choose. With life expectancy across the UK rising at a surprisingly fast rate, it’s crucial to make sure the money you have saved lasts as long as you need it to. It’s important to remember that anyone investing at the age of 55 still has an investment time horizon of as much as 30 years.

Bonds and cash

Historically on the approach to retirement you would start piling into bonds and cash. But this is no longer a sensible investment strategy because selling out of equities too soon will leave the real value of your savings at risk., especially as interest rates are low and inflation has been edging upwards. Instead, you might reduce your equity holdings and increase exposure to bonds as well as alternative investments to provide additional diversification. Experts recommend keeping between 15% and 50% in equities, but it all depends on your appetite for risk and how much cash you are drawing.

It will be important to protect the capital you are now drawing on from inflation. There are funds specifically designed to preserve capital while delivering above-inflation returns. You can limit volatility by using a multi-asset income fund which invests in a range of assets. They can help capture the growth of various asset classes at a risk level to suit you, as managers can dip in and out of a wide range of markets on your behalf. You can also cut the risk of exposure to volatile equities by moving from growth to income stocks.

Investment trusts 

Investment trusts might be worth a look as they can create steady returns using a unique feature. They are allowed to stash away up to 15% of their dividends each year and use this money to boost dividends in difficult years. This is an important feature for those drawing on their pension funds using income drawdown. If a company hits hard times and reduces or even scraps its dividend payments, individual savers relying on this income will feel the hit as their income could drop substantially.

Further, in certain circumstances, investment company boards may elect to pay income out of capital. While this can erode the long-term capital returns generated by the funds, many investors who rely on the income are happy to prioritise these short-term income payments over and above capital value. You might want to consider increasing exposure to alternative investments that can provide additional diversification and protection from sharp market falls.

There is no one-size-fits-all approach to selecting investments for retirement – or anything else – and it is best to talk to a financial planner or independent adviser who can recommend funds if you are not confident to do so yourself. You will have to pay for professional advice, but it’s money well spent if it means making the right decision and making your money last — it’s like getting your car serviced annually to keep it in tiptop condition.

Photo by Robin Vet on Unsplash

Article is accurate at date of writing.