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Your 12 Step Guide to Pension Investment – Part 1

In this two part guide, we share the 12 things to consider when planning for your retirement.


This does not constitute advice and advice should be sought in all instances before acting on it.


Pension freedom reform has changed the retirement game completely. Savers with defined pension contributions now have the option to keep their money invested and withdraw it when they need it, as opposed to buying an annuity. Some folks may still go down the annuity path, but others will be drawn to the idea that they can keep their pension pot invested and employ a drawdown scheme to use as their retirement income.

This new path might be tricky to navigate for people who have little to no experience with stocks, bonds, and funds, but you absolutely don’t have to go it alone. The guidance a financial advisor provides is invaluable and won’t limit your retirement planning to pensions alone, but can certainly help you get started with your pension plan.


Once you’ve selected your financial expert that will help you on your investment journey, here are the first six steps to take.


1. Pick your product

Income drawdown schemes allow you to withdraw portions of your pension while keeping the rest invested. This will provide you with an income to live off, but keeps your money working for you. Within this product set, there are a number of options to reflect your risk comfort level, and your experience in investing.

Fixed term annuities are short-term (varies, but often 2-4 years) investments that let you postpone how you’re going to bankroll your retirement. With this option, there are also lots of variations, for example, the percentage of your money that will be used for income and when in life that percentage will change.

There are also hybrid annuity-drawdown options available. You still buy an annuity to provide yourself an income but the remaining pot is put into a drawdown scheme to hopefully grow your savings more.


2. Decide your income

Once you’ve selected your product, you’ll need to determine how much income you want each year. Thanks to reform, there are no limits to how much you can withdraw – but tread lightly with that freedom.

Experts suggest 3.5-4% as income as a starting point, but advise to continually monitor the state of the economy to determine whether or not you need to change your strategy.

You don’t want to over withdraw too early and leave nothing left for later in life. If you do run low, there are plenty of options to help turn things around, as long as you’re aware ahead of time.


3. Keep an eye on tax

Pay attention to tax rules surrounding your pension investments.

A quarter of retirement pots are tax free, but the remaining 75% are taxed at the usual tax rates.

Don’t forget this if you take the initial 25% as you’ll pay the taxman for your error every time you need to withdraw from your savings on the remaining pot. When deciding your income, be sure to include tax in your calculations so you don’t end up in a higher tax bracket when you settle on an amount.


4. Diversify your portfolio

Where you are in your investment journey will affect how risky your investments are. The closer you get to retirement, the safer your investments should become to ensure your pension is as robust as possible when it comes time to cash out.

A financial advisor will, of course, help you decide on the mix of assets and timing because it can be quite difficult to decide on your own. You’ll need to choose between shares, bonds, property, cash, funds, etc. – and settling on when to switch things up and how to allocate your investments can be a difficult task.


5. Interest rates and bonds

It’s essential for people with a pension fund to track the Bank of England interest rates as they affect the entire UK economy. If the rate rises, stock markets and bonds will be impacted.

Normally seen as a safer option, bonds could fall by the wayside, creating a domino effect with annuity rates as well. Higher interest rates could actually increase the level of interest in annuities and you may want to re-evaluate your plan.


6. Stay on top of your portfolio

Financial experts suggest you do an annual check on your investments at the same time each year. As previously mentioned, there are a number of factors that could influence the health of your bank account so it’s important to evaluate your retirement plan regularly.

If you have a financial advisor, you’re a step ahead as they’ll perform this check for you and suggest changes that need to be made to keep your pension pot thriving


Read the second part of our two part guide to pension investment to make sure you are considering all your options. Talk to one of our experts for tailored financial advice.


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