One benefit of investing in funds is that they hold investments with lots of different companies. You could choose to invest in individual government or company bonds, or company shares that pay dividends rather than funds, but a fund may give you a wider range of investments. They include bond funds, income funds and multi-asset funds. When you’re retired, income-generating investments can be a good option for investing your pension pot. And, if you increase your withdrawal amounts, your pension pot will run out even quicker. This means you may need to take more money from your cash pot to maintain your living standards. So the money you take out today will not buy the same amount in 5, 10, 15 or 20 years’ time. Second, inflation generally means that prices will rise over the long term. If you live longer than 20 years, and many people will, you’ll get nothing from this cash pot. For example, if you have £100,000 and you take £5,000 a year, this will last 20 years and no more. Investing all your pension pot in cash is generally a bad idea unless you’re planning to take it all out in a short period of time.įirst, without your money growing, the length of time your money will last is simply the value of your pension pot divided by the amount of annual income you want to take. Just remember to keep an eye on your cash pot and top it up if you need to. That will help to protect the value of your pension pot over the long term. This can be a big advantage when markets are down as it means you don’t need to sell investments when prices are low. Keeping some of your pension pot in cash (say, in a cash account, term deposit account or cash fund ) can be a good idea because it means your immediate income needs can always be met. How much you take out and how often are two of the main factors affecting how long your income might last, so it’s important to consider this carefully. If it’s gone down more than you expected, you may want to think about taking a lower amount for a time until your pension pot has recovered a bit. If it’s grown by more than you expected, you may be able to take a little more out. You can then make adjustments depending on the value of your pension pot. You should review your investments and the amount you’re withdrawing regularly – at least yearly. That means if you have £100,000 in a pension pot, you would start withdrawing £3,000 to £5,000 a year. If, on the other hand, you’re looking to withdraw money to support your income needs for the rest of your life, which could be a few decades, then you could limit withdrawals to somewhere between 3% and 5% of your pension pot. Then you’ll be looking to withdraw an amount roughly equal to what you need each year to bridge that income gap. Say you’re wanting to use one pension pot or part of one pot to give you income that can bridge a gap between stopping full-time work and reaching State Pension age. How much you should and can safely take from your pension will depend on what you want to use the money for, how long you want to withdraw it over, how often you want to withdraw and how you choose to invest your money. So, if you take too much too early, especially when the markets are on a downturn, you could significantly reduce how long your income will last. Remember, most people will live 20 years or more in retirement. It’s particularly important in the early years of your retirement when losses can disproportionately affect how long you might be able to take income for. This is important because if your pension pot drops in value and you continue to make withdrawals from it, it’ll be much harder for your pot to recover its losses when the stock market rises again. If, on the other hand, you want to begin using the money to give you a regular income, you might choose investments that won’t go up and down too much as the stock markets change. Once you begin taking money out, the way you invest your pot needs to be more personalised to the goals you have for using your money.įor example, if you’ve taken some money – maybe to pay off your mortgage – but don’t intend to start drawing down more money for retirement until a few years later, you may want to focus on protecting the money and still trying to grow it slightly. Now you might be trying to grow it to keep pace with inflation while also trying to protect it from any big drops in value. But, as you approach retirement, that may change. When you were building up your money in the early years, generally you were trying to grow it as much as possible. When you switch from building up money in your pension to taking money out as you move into your retirement, the way you invest your pension may need to change to reflect your new goals.
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