When you have saved towards retirement throughout your working life, the last thing you want to do is make a crucial mistake and jeopardise the lifestyle you had hoped for. Hopefully you will have the security of the state pension – around £12,000 a year – and you may even be lucky enough to have a final salary pension that guarantees an income for life.
But for most people, a large part of the income they rely on in retirement will come from careful investing and dipping into savings built up over decades.
How you meet this challenge will be unique to you, but we have identified five main investing personality types each with their own priorities, strengths and pitfalls.
See which one you most identify with and heed the advice from our experts to make sure that you achieve the retirement income you’ve strived for.
Two pension experts from different corners of the industry have given their verdicts on these personality types.
Matthew Sellens is managing director of the St James’s Place partner practice, Crown Wealth Consultants, which helps clients to transition at retirement to living on their investments.
And Tom Selby is director of public policy at DIY platform AJ Bell, where you can manage pension investments yourself or have your financial adviser do so for you.
The personality types are a rough guide – you will need to tweak depending on your own levels of wealth and circumstances.
THE SPENDER: Life is for living and the children will be all right
You saved all those years to enjoy your retirement and would spend your pension down to the last pound on the final day of your life if that were possible.
‘The temptation will be to raid the pension pot quickly to fund holidays, home improvements and fun,’ says Mr Sellens. ‘It’s important to build in some guardrails.’
He suggests keeping a year or two of income in cash so you aren’t forced to sell investments in volatile markets, putting the rest in a balanced mix of shares and corporate and government bonds, and keeping withdrawals to 3 per cent to 4 per cent of your fund a year.
That should help reduce the risk that you run out of cash. Mr Selby says: ‘Your time horizon could be 30 years or more, which is long enough to take some risk. Review your retirement strategy regularly. Be prepared to adjust your plans if your investments don’t perform as expected.’
He says you could also consider an annuity. These are financial products that allow you to use your pension pot to buy a guaranteed income for life.
This can be a good option for those who would prefer to know exactly how much income they will get every year. Annuity deals are much better value since interest rates returned to more historically normal levels in recent years, with £100,000 currently buying a guaranteed income of around £7,800 a year for a 65-year-old man.
You can combine buying an annuity with investing your pension from the outset or wait to get one when you are older (and perhaps in poorer health) and qualify for better deals.
RISK WARNING: A period of low returns could be a serious blow, especially if you keep making regular withdrawals. You might never make up these losses.
VERDICT: Enjoy yourself but set some sensible boundaries.
THE SAVER: I’m careful with money and want to leave an inheritance
If you are naturally cautious you might find leaving your lifetime savings at the mercy of financial markets too much to handle.
You might want to consider an annuity if you are a worrier prone to sleepless nights, and if you do decide to invest then steel yourself to take some risks to make it worthwhile. If you are planning to leave something to your children, be aware that inheritance tax will start being levied on pensions from April 2027.
The basic threshold for inheritance tax is £325,000, or if you are leaving a family home to direct descendants it’s £500,000 – double those figures if you are a couple.
Mr Sellens says this kind of investor will probably be drawn to corporate bonds and government bonds and other income generators, as these are typically lower risk than shares. However, he cautions that you should not abandon shares altogether as they can help to grow the value of your savings, which combats inflation. Mr Selby says take a balanced approach to passing on an inheritance, and consider making gifts to loved ones during your lifetime if you can afford it. He adds: ‘Most people’s kids wouldn’t want to see their parents struggling in retirement.’
RISK WARNING: Look into whether pending inheritance tax rules on pensions will affect you.
VERDICT: Spend some of your hard-earned savings on yourself.
Tom Selby says it is key to accept that investing involves risk, be realistic about your withdrawal plan and stay engaged
THE LANDLORD: My property is my pension
You might own a couple of buy-to-lets in addition to your home but have negligible pension savings. Perhaps you are distrustful of pensions and investing generally and feel safer with property, which you have seen soar in value in recent decades.
Many might be deterred by the bothersome admin and taxes, not to mention tenants, which come with letting out property, but you take broken boilers in your stride.
If rent is providing most of your income, make sure that you don’t buy other investments that are property related so you don’t have all your eggs in one basket, he suggests.
Try to ensure that other investments can be sold easily if necessary as it can be hard to offload property quickly if you suddenly need the money. He suggests global shares and bonds, ideally through simple low-cost funds.
Mr Selby says using property as your pension has sizeable risks –finding reliable tenants, income dips when properties are empty, the property market taking a tumble, and significant taxes.
‘Consider topping up your pension pot if you can afford to, as this will mean at least you have something you can fall back on other than your state pension if your property investments do not work out as you had hoped,’ he says.
RISK WARNING: Your wealth is over-concentrated in property.
VERDICT: Save at least something into a pension and check whether you will get a full state pension.
THE INVESTOR: I’m canny enough to grow my pension in retirement
Your goal is to invest so shrewdly you not only achieve enough growth to replenish your pot as you make withdrawals, but you come out ahead by the end of your life. Maybe you are a hobbyist investor, who enjoys researching and monitoring your portfolio.
Mr Sellens says you might want to keep a larger share of your pot, say 60 per cent to 70 per cent, in shares which are diversified across global markets, and use bonds plus cash as ballast as they do not tend to rise and fall in value with shares.
‘The danger is overconfidence when it comes to chasing returns – taking too much risk or underestimating how damaging a market crash can be early on in retirement,’ he says.
Be realistic about your withdrawal strategy and review it regularly, just in case the markets take a dip at the wrong time, says Mr Selby.
‘If you are picking individual stocks, making sure that your portfolio is well diversified and you don’t trade too often, racking up charges and possibly losing sight of your overall strategy, is essential.’
RISK WARNING: Don’t be over-confident, or over-trade.
VERDICT: You are better placed than most to invest wisely. Look at low-cost passive funds, for example a popular global tracker such as Fidelity Index World, or a multi-asset fund such as Vanguard LifeStrategy 80% Equity.
Matthew Sellens suggests keeping a larger share of your pot, say 60 per cent to 70 per cent, in shares which are diversified across global markets
THE LOAFER: I just want a hassle-free retirement
You know little about investing and see it as just another admin chore before you get back to more enjoyable pastimes.
Lack of patience or attention to your investments might be your downfall. If it helps, remember doing a good job with your savings might mean you can afford more treats and luxuries, or an extra holiday each year in retirement.
‘The priority is simplicity,’ says Mr Sellens. ‘A good option can be an all-in-one fund – for example, a diversified multi-asset or target-date retirement fund – that balances between shares and bonds.’
He recommends using a low-cost platform to set up a simple income strategy, checking it once a year, and keeping a small emergency pot to avoid dipping into investments at the wrong time. Mr Selby says you should consider investing in retirement only if you are willing to stay engaged with it, and if not, then buy an annuity.
RISK WARNING: You could make a real mess of investing if you don’t watch out.
VERDICT: Brace yourself and learn something about investing. Review your portfolio every year, or consider paying an adviser.
CONCLUSION: The ‘you can’t go wrong’ attitude
There may be no ideal strategy but there are some simple, basic rules everyone can follow.
‘For many retirees, a middle ground is the wisest course,’ says Mr Sellens. ‘This means spreading money across shares for long-term growth, bonds for stability, and cash for short-term needs.’
Accept investing involves risk, be realistic about your withdrawal plan and stay engaged, says Mr Selby. He adds: ‘Setting out a sensible budget is always a good place to start and for many people, combining the security of an annuity with the flexibility of drawdown will be the right approach.’
You should set up a power of attorney so someone you trust can take over if you fall ill, and consider getting a financial professional to help you plan.
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