Is there a magic formula/best investments strategy for retirement? No. Is there a way to determine what strategy is right for you? Absolutely.

Getting the right strategy and the best investments for you now is going to make a massive difference to your retirement.

But before you decide where you need to be investing, you need to decide how you would like to receive your retirement income.

Best investments under the old way of retiring

The traditional approach to choosing the best investments for retirement is to take higher risk when you are younger and then reduce the risk you take as you get older and approach retirement.

The reason for this approach?

Well, again, traditionally at retirement, people who had built up their own pension pot (a defined contribution pension) as opposed to those who received a pension linked to their salary (final salary/defined benefit pension), would use their pot to purchase an annuity with an insurance company.

An annuity is where you receive a guaranteed income for the rest of your life in exchange for your pension pot. It is a one-off irreversible decision.

The level of income you purchase via an annuity will depend on the size of your pension pot, your health at the time of purchase and the annuity rates (a bit like interest rates) on offer.

As a simple example, if the annuity rate at the time of purchase was 2% then a £100,000 pension pot would get you £2,000 per year income.

A £200,000 pension pot would get you £4,000 per year income.

Therefore, when purchasing an annuity you want your pension pot the biggest it can be and this is why people traditionally, lowered their investment risk as they approached retirement. You don’t want the value of your pension pot falling in value if the stock markets tumble just before you purchase your annuity!

Pensions have changed and so have the best investments for retirement

But times are changing. Back in 2014, the then Chancellor George Osborne announced ‘Pension Freedoms’ and stated that no one would need to buy an annuity if they didn’t want to.

Since the announcement, sales of annuities over the first 6 months of 2017 fell by 21% when compared to the previous 6 months.

You see the problems with annuities are as follows:

It’s a one-off irreversible decision.

  • Apart from increasing by inflation, you have no flexibility over your income withdrawals, so if you wanted to spend more in your early years of retirement, you wouldn’t have this option.
  • In the worst case scenarios your annuity income can die with you leaving your partner and dependants with nothing.
  • As we are living longer the annuity rates and level of income offered have reduced significantly.

So with ‘Pension Freedoms’ Osborne confirmed that instead of buying an annuity people would have flexibility over how they withdrew money from their pension.

This method is called drawdown.

With drawdown, you remain in control of your pension pot, it stays invested and you can withdraw as much out of your pension pot as and when you like, until it runs out.

So before knowing what the best investments are, when you’re close to retirement you need to decide what you want your retirement income to look like.

Do you want an annuity or are you going to take the drawdown approach?

The best investments for your retirement strategy

If you are single, without children and a cautious person, then you may like the certainty that an annuity gives you.

If this is you then the best investments are ones that reduce your risk as you approach retirement and there are investment funds that do this for you automatically, they are called ‘Lifestyle funds’.

With Lifestyle funds, you chose the age at which you want to retire and the fund will automatically invest into higher risk assets whilst you are young, and lower risk assets as you approach your retirement age.

But if you like the sound of drawdown then Lifestyle funds could be a disaster for you!

Think about it, do you want an investment strategy that at the point of your retirement, is invested in low risk assets like cash when the pension pot will remain invested for the rest of your life?

If you’re retiring at 65, you may still have a 30 year timeframe for the pension pot to last. Having the pot sitting in cash and then taking withdrawals means it isn’t going to last very long!

The best investments you need are focused on providing growth over the long term. You need your pension pot to grow above inflation so that it stands a good chance of outlasting you.

So what should you do?

#1 – Check how your pension is currently invested

If it is sitting in Lifestyle funds you need to decide if these are the best investments for you. If you are going for the annuity at retirement then it’s probably OK. If going for drawdown then you most likely need to change it.

#2 – Decide on the level of risk you are comfortable taking

Think back to 2008 or 2001, two of the nastiest stock market tumbles of the last 20 years. How did you feel during this time? Did you see your pension and investments fall significantly in value?

If this stressed you out then you may want a lower risk profile going forward e.g. the best investments for you may be more bonds than equities.

If it didn’t bother you and you understand that over the long term markets recover and grow, then you might want to opt for a higher risk profile e.g. the best investments for you may be more equities than bonds.

Neither is right or wrong, it’s what suits you and your objectives.

#3 – Keep your investment costs low

We can’t control what the stock market is going to do but we can control costs.

Avoid all the clever marketing of active investment managers when it comes to looking for the best investments and look for index tracking funds that usually beat the active managers for much less cost!

Ultimately your retirement is very unique to you and the planning will be different to someone else’s. Pension drawdown can be a complex area to manage as there are tax consequences to factor in, picking the best investments and trying to make your pension pot last the rest of your life can be a very daunting challenge.

But there are proven strategies that will make investment less scary and professional advice is always recommended if you want to proceed down this path. Even if it’s just a check to make sure you are doing everything right.

The key takeaway from this article is to make sure you check your pension/s now and make sure it is invested in a way that suits your retirement objectives.

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.