Should I keep my pension invested?
If you're investing in income drawdown, the stakes couldn't be higher. You are investing to provide an income throughout your retirement, however long it lasts.
And because investing in the stock market means putting some of your savings at risk, there's always a chance that your plan will go awry – your investments could plunge in value, making your desired income unsustainable.
More dramatically, you could simply run out of money if you take too much too soon.
But this doesn't mean income drawdown should never be considered. It can make a lot of sense if you want flexibility, the opportunity to keep growing their pension pot, and if you are happy to take some carefully-considered risk.
Video: using the pension freedoms and income drawdown
In this short video, we speak to people about their experience using income drawdown in retirement. Find out how it factors into their retirement planning.
Where can I invest my pension in income drawdown?
When investing in the stock market, there are tried and tested principles that you can follow to make sure you aren't taking more risk than you are comfortable with.
The key is diversification – not putting all of your eggs in one basket.
You can invest in a range of different asset classes. These include:
- Corporate bonds and gilts
- Commercial property
- Equities, or stocks and shares
In theory, different assets move in value at different times and for different reasons, meaning you won't be over-exposed in any one area.
Different funds and trusts tend to specialise in either specific geographical areas, such as the UK or US, or in types of assets, such as dividend paying shares.
Find out more: The Which? portfolios – our tool can help you find the right mix of investments
How long will I need to invest for?
The great attraction of annuities is that they provide certainty.
When you hand over your pension to an insurance company, it is offering you a guaranteed income for life – regardless of how long you live.
When an insurer does this, it estimates how long it thinks people your age will live and it takes on the risk that you might live longer than your savings last.
With income drawdown, it's you who has to estimate how long you are likely to live – and you who takes the risk that your money will need to cover a longer-than-expected period.
Data from the Office for National Statistics (ONS) reveals that an average man turning 65 in 2018 would live another 21 years, with a 65-year-old woman living another 24.
And further analysis reveals that retirement could feasibly last 40 years. See the graphic below.
What are the different ways of taking an income?
There are two common strategies adopted by those seeking to generate an income from their investments in income drawdown.
One approach is to take a ‘natural income’ from your investments.
This involves buying assets that pay an income such as shares, which pay dividends, and corporate bonds, which pay interest.
In theory, this approach means you can take an income from your portfolio, leaving your capital invested in the hope it maintains its value or grows over time.
Of course, this means your income would be limited to the amount paid by the investments you make.
It would typically be possible to generate around 3% or 4% in this way from a combination of dividend paying shares and lower risk corporate bonds.
If you need more income than is produced naturally by your portfolio, or if you have a preference for 'growth' investment because you think they are better overall prospects for the future, the alternative approach is known as ‘selling down’.
This involves selling your portfolio gradually over time.
Do I need to take financial advice?
DIY investing is increasingly popular, but we think income drawdown is one area where the expertise of a professional financial adviser can really add value.
A financial adviser will take into account all of the factors covered here, and many more, in order to tailor a plan to your objectives and your attitude to risk.
Find out more: Financial advice – the comprehensive Which? guide
What are Sipps and fund supermarkets?
If you do decide to go down a DIY route, the accounts that are likely to offer the widest investment choice are self-invested personal pensions, or Sipps.
These accounts are most prominently provided by fund supermarkets – brokers that offer investors the chance to hold a combination of different investment together in one place.
Which? has analysed the pension drawdown plans offered by more than 20 pension companies and fund supermarkets.
Find out more in our guide to comparing pension drawdown plans and charges.