Investing in retirement

In the past investing when approaching retirement was all about reducing risk and converting investments into cash ahead of buying an annuity. That is still the case if you do intend to buy an annuity.

You need to think longer term if you are going to keep your pension fund invested and take an income via drawdown or lump sums. Your pension pot may need to provide you with an income for 30+ years and to do this it should ideally generate income and preserve your capital. You should always research any investments thoroughly, and never be rushed or manipulated into making decisions. Your pension will be one of your most valuable assets and you should always be wary of pension fraud.

How you invest will depend on how you plan to use your pension fund – will it be the main source of regular income, used to provide for one-off expenses, left to provide for your family when you die or a mixture of all of these?

When choosing investments you also need to consider the level of risk you are willing to take and how a downward turn in the market would impact your retirement income. The same principles of investing as usual apply and a well-diversified portfolio with a range of assets, geographical areas and sectors will help you weather most storms.

Generating cash to pay your pension income

When you reach retirement age, if you need to withdraw money from the fund, either regularly or ad hoc then you will need to generate cash within your fund to make your pension payments. This could be from income generating shares or funds or by selling investments.

If you are dependent on this income then it might be a good idea to keep some of your portfolio in cash so that you are not forced to sell investments when markets are low – although investing in cash will give a poor return, especially in times of higher inflation. Cash could be generated by income paying investments such as corporate bonds or equity income funds.

You may consider investing in the income units of funds, for example, rather than the accumulation units. The former indicates that dividends or interest will be paid to you in cash. In contrast, an accumulation version of a fund is designed to offer you growth in the fund rather than income, so any income generated will be reinvested within the fund.

Help choosing your investments

Don't have the time to research and choose your investments? Help is at hand – we offer some easy, time-saving investment ideas. Whether you're after a few fund suggestions, are looking for a pre-built portfolio you can manage yourself, or want to leave the hard work to the experts, we can help.

Dan Coatsworth, the editor of Shares Magazine, now suggests six income funds from AJ Bell’s favourite funds list which he thinks could be suitable for generating an income in retirement:

Fund Description KID/KIID
Evenlode Income This fund likes to invest in companies where it can see sustainable dividend growth, focusing on businesses with high returns on capital and strong free cash flow. Yielding 2.5%, the fund’s dividends have increased every year since it launched in October 2009 by an amount greater than UK inflation. Investors have been rewarded with capital gains as well as income as illustrated by 12.1% trailing annualised returns over the five years to July 2018. The portfolio mainly consists of UK-quoted stocks such as Unilever and Compass with overseas holdings including Pepsico.
iShares Global High Yield Corporate Bond ETF This is a low-cost passive fund which tracks an index of high yield bonds issued by companies around the world. It has a 4.8% historic yield with dividends paid twice a year. The total expense ratio is 0.5% a year, representing various fees and expenses for running the fund which are shared by investors. The index includes bonds from the likes of telecoms firm Sprint and healthcare services group Tenet Healthcare.
Man GLG UK Income Fund Man GLG UK Income aims to outperform the FTSE All-Share index by investing in companies of all shapes and sizes. At the time of writing the portfolio includes holdings in defence technology business Qinetiq and life insurer Aviva. Fund managers Henry Dixon and Jack Barrat seek to put money into undervalued and unloved companies, particularly ones where the market appears to be undervaluing their profit stream. The portfolio also contains various corporate bonds. A 5.8% historic yield should appeal to investors seeking a greater return than cash in the bank. KID/KIID
Newton Global Income Inc Investors seeking diversification may find Newton’s fund interesting given that it invests in companies listed or located throughout the world. The asset manager takes a thematic approach to investing which focuses on structural changes impacting the global economy such as demographic shifts and the growing demand for healthcare. It tends to hold between 50 and 80 stocks and presently yields in the region of 2.9%.
Jupiter Asian Income Fund manager Jason Pidcock has more than 20 years’ experience in finding good investments across Asia. At Jupitar Asian Income, he is seeking out high quality companies which can increase their dividends as their businesses grow over time. The fund invests primarily in companies listed or located in Asia Pacific including Australia and New Zealand, but excluding Japan. Current holdings include Korea-based Samsung Electronics and Hong Kong real estate investor Link REIT. The fund yields in the region of 3.8%.
First State Global Listed Infrastructure Acc Investors looking for income opportunities in retirement may wish to take a closer look at infrastructure for several reasons. Firstly, many infrastructure assets are able to raise prices in line with inflation. Secondly, infrastructure can be less volatile in performance than the stock market. The First State fund yields in the region of 3% and invests in a diversified portfolio of listed infrastructure assets around the world and pays dividends twice a year.

Remember that this is only guidance to help you - you should research each investment and consider whether it suits you before investing.

Need some investment ideas? Have a look at our AJ Bell Favourite funds list or leave it to the experts with the AJ Bell Passive funds.
Considering investment trusts?

Have a look at our most popular trusts and research from Kepler Trust Intelligence