How to invest during retirement to protect your pension pot

Should you invest during your retirement? If you have a pension pot (rather than a final salary workplace pension), then you’ll have been an investor all your working life – even if you weren’t aware of it.

The investments in your pension fund will have built up over time to provide you with an income when you retire.

But where should you put your retirement money after you have retired?

Well, depending on how you choose to take your pension, you may continue to be an investor via your pension fund.

Or you might choose cash in your pension and buy an annuity with all or some of your pension pot.

Here you can find out more about investing in retirement.

What are the different types of investments for retirement?

There are several options for your retirement investments.

Many people opt to leave their pension invested in a drawdown scheme to provide a pension income. You can choose to invest your pension in a variety of ways, including equities, bonds or other types of investments.

You can also opt to exchange your pension for an annuity, which offers a guaranteed income for life - it’s a type of insurance product rather than an investment.

You can’t back out once you’ve bought an annuity, so it’s important to do your research and consider getting financial advice. Read more about the pros and cons of annuities here.

You can also opt to use a mixture of drawdown and annuities, buying an annuity with only part of your pension pot.

How do you invest with your drawdown scheme?

When you’re saving up your pension pot, the money is invested in a fund designed to provide long-term growth. When you come to take your pension pot, you may decide to keep it invested in the stock market and draw an income from it over the years.

However, this approach – known as drawdown - often requires a different investment strategy from saving up a pension pot.

Although you’ll still want to achieve long-term growth, you’ll also need to provide an income. Investing for income generally means trying to choose assets that provide more stable growth and are less vulnerable to dips in the stock market.

However, moving your pension into drawdown won’t automatically change how your pension is invested. 

Choosing your drawdown investments

Here’s how it works:

• Workplace pension: Your drawdown pension is likely to remain in the default investment fund, although you can choose to invest elsewhere.

• Self-invested personal pension (SIPP): You choose where your money is invested in retirement. You could stick with the same investments in retirement or choose new ones.

Making suitable investment choices is crucial because if your drawdown pension pot fund loses too much value and you continue to make withdrawals from it, it will be much harder for it to recover its losses when the stock market rises again.

So how do you choose the right assets? Fortunately, a financial adviser will arrange this for you.

Pension providers offer ready-made drawdown portfolios to suit a variety of retirement lifestyles, and your financial adviser will be able to recommend the best ones for your needs.

The important thing to remember with drawdown is that you are still an investor, relying (perhaps entirely) on the stock market for your future income.

Stock market crashes can and do happen, particularly in response to unforeseen events like COVID-19.

If your fund is hit hard by a dip, do you have other sources of income you can use while it recovers? These are the sorts of things that you should discuss with a financial adviser.

How do you invest your pension income?

If you have spare income in retirement, you could buy assets that you hope will generate a return.

How you do this will be much the same as investing at any time of life – but with the added caveat that your disposable income may be lower, so you may not have as much spare cash.

Reinvesting your tax-free lump sum

When you access your pension (which you can do from the age of 55, rising to 57 in 2028), you have the option of taking 25% of the pot as a tax-free lump sum.

If you don’t have any specific need for this money in the short to medium term, then reinvesting up to £20,000 each tax year in a stocks and shares individual savings account (ISA) may be a sensible option. Investments held in an ISA are protected from capital gains tax (CGT) and dividend tax.

Taking a lump sum from your pension is a big decision, so it’s important to weigh up carefully.

Taking too much money from your pension early on in retirement could significantly reduce your retirement lifestyle or increase your tax bill.

Any money you withdraw will lose its protection - pension wealth is protected from CGT, dividend tax and tax on interest and until April 2027, pensions are also exempt from inheritance tax.

How much income should I withdraw from my drawdown scheme?

If you have a drawdown pension, you’ll need to choose how much income to withdraw. Many experts suggest withdrawing 4% to 5% from your scheme each year.

This allows your remaining investments to continue to grow over time. A financial adviser will be able to advise you on a sustainable withdrawal rate.

With drawdown, it’s best to take out only as much income as you need to spend.

Pension income is taxed if your total income is over £12,570 each year, possibly offsetting any investment gains you might make.

If you buy an annuity, on the other hand, you receive a regular, fixed amount.

The amount you receive in exchange for your pension will depend on the type of annuity. Inflation-linked annuities cost more, so you’ll receive less income to start, but you’ll see your income increasing over time.

1. Decide why you want to invest in retirement

Make sure you know your own reason for investing.

Is it to supplement your income in the future – perhaps for when you may need long-term care? Is it for a particular goal, such as a dream holiday or to help children onto the property ladder? Or is it simply because you enjoy the challenge, or want to leave more of a legacy for your family?

Knowing your goals will help you determine your investment strategy.

2. Understand your risk appetite for retirement investments

Typically, an investment portfolio is made up of different types of investments, including equities, bonds, commodities or unit trusts. These are known as asset classes.

Each can be rewarding, but you have to be willing to accept the investment risks and know your limits.

The more you have invested in equities, the higher risk your investments are likely to be. Using bonds alongside equities can help reduce your overall risk.

A financial adviser will help you to work out your risk appetite (also known as risk tolerance). This may differ from what you expect: you might be much more (or less) able to withstand risk than you think.

Remember, there are also risks involved in not investing – such as cash losing value over time due to inflation. Always factor these in when weighing up your options.

Keeping large sums in a low-interest cash account isn’t always as safe an option as it looks.

3. Pick asset classes that align with your risk appetite and income goals

With your risk appetite assessed and marked as low, medium or high, you can now build your investment portfolio.

A balanced portfolio will usually be a mixture of asset types, each with a different risk profile.

The basic building blocks for investment are equities, bonds, alternative investments and cash.

Here is a summary:

• Equities/shares (Medium to high risk): They usually grow at a faster rate than other assets, but also fluctuate more in value as they are affected by stock market volatility. Choosing an exchange-traded fund (ETF) or fund rather than individual shares helps you achieve a more diversified portfolio with your money spread across a wide range of companies.

• Bonds (Low to medium risk): They offer a fixed income and fluctuate less in value than shares, but also tend to grow at a slower pace. They can be a valuable part of your portfolio, as they help balance the volatility of equities.

• Cash (Low): You may decide to hold cash or money market funds as a small part of your portfolio, especially if you want to withdraw funds in the next five years.

• Alternative investments (Medium to high risk): They are an optional extra and are more suited to experienced investors. They include offshore investments and alternative investments such as physical objects (wine, antiques, etc.). What you choose depends on your goals and risk limits.

You can also choose ethical investments to suit your broader financial goals.

It’s good practice to build a diverse investment portfolio, including assets classed as high, medium and low-risk.

High-risk assets generate most of the growth, while the lower-risk assets cushion you against losses.

4. Seek financial advice

Seeing a financial adviser is crucial if you plan to invest retirement income.

Firstly, there may be practical aspects of your lifestyle that you have not yet considered, which may influence your investment strategy.

A financial adviser is trained to probe into your finances as a whole and so recommend the best approach for you personally.

They may even recommend that investing is not the best avenue for you after all. You don’t have to agree, but their opinion is worth having.

Help with choosing and managing investments

Secondly, an adviser can help you choose the best asset classes and recommend the best funds available for your needs.

Unless you want to, you won’t have to invest from scratch by picking individual stocks – a qualified adviser can select suitable products from the whole of the market.

Thirdly, your financial adviser can handle as much of the investment admin as you need.

Some people enjoy this side of things and like to play an active part in their investments – if this is you, then it’s a stimulating way to spend some of your free time.

Most people, however, lack the level of experience to manage their own investments confidently, so they are happier to leave it to their adviser.

5. Withdraw from your portfolio in a tax-efficient way

Careful tax planning is essential when you start to withdraw cash from your portfolio. 

Here are a few things to consider:

• Taking money from your pension or ISA means your investments or cash will lose protection from CGT, dividend tax and tax on interest.

• Pension wealth is currently protected from inheritance tax (IHT), although this is set to change in April 2027, with pensions being brought into the IHT net.

• The order you make withdrawals can affect your tax bill. Income tax is charged on pension income, and CGT is potentially charged on the sale of investments or buy-to-let property.

Use tax bands and allowances to your advantage

When it comes to pension income, an adviser can help you make use of tax thresholds and allowances.

For example, someone with a large pension could pay 40% tax if their total taxable income is more than £50,270 in a tax year. Instead, they might decide to withdraw income of up to £50,270 each tax year to ‘fill’ their basic rate tax band. 

You can avoid paying tax on investments by investing in a stocks and shares individual savings account (ISA).

Each year, you can invest up to £20,000 in ISAs, and there will be no tax to pay on any investment gains.

This can provide a helpful way of topping up your income further down the line without increasing the amount of tax you need to pay.

Consider the impact of Capital Gains Tax

However, if you have investments held outside of tax wrappers like ISAs and pensions, you will need to consider tax.

Growth on investments is subject to capital gains tax, so you may have to act carefully to avoid losing more than necessary.

Everyone has a CGT allowance (£3,000 for the 2025/26 tax year and £1,500 for trusts), so if the growth on the investments you sell cash in is lower than this, there will be no tax to pay.

The rate of CGT is 18% if you are still a basic rate taxpayer after the taxable gain has been taken into account, or 24% if you pay higher or additional rate tax.

There are many ways in which investment can make your money go further in retirement. Talk to a qualified financial adviser about which options suit you best.

Get expert pension and retirement advice

Investing during retirement can be a smart way to enhance your pension income, but it's essential to have a clear strategy that aligns with your financial goals and risk tolerance.

Whether you are investing through a drawdown scheme or using surplus income to build a portfolio, seeking guidance from a financial adviser can help you make informed decisions and navigate potential tax implications.

With careful planning, you could potentially maximise your returns and ensure your retirement savings work harder for you.

Unbiased can quickly match you with a financial adviser for expert financial advice to ensure you have the right support and help you optimise your investments and manage your pension pot effectively throughout your retirement.

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