Reducing risk

Preparing your pension savings for retirement

As you get closer to retirement, you need to consider how to turn your pension savings into an income and how you can reduce the risk of your level of income falling.

There are three ways of turning your pension savings into an income. They are:

  • flexible income (drawdown)
  • guaranteed income (annuity), or
  • taking cash from your pension

Remember, you can mix and match options too.

The investment option you chose may already provide a way of preparing your pension savings for retirement. For example, if you have invested in a lifestyle profile, it will gradually and automatically move your money into funds aimed at aligning your pension savings with your plans for retirement.

You should make sure any lifestyle profile you choose is appropriate for how you plan to take your retirement income.

It's also important to consider when you'll take your retirement income as lifestyle profiles make changes to your investments based on your selected retirement date. So they may only be suitable if you're planning to start taking your retirement income at your selected retirement date.

If you aren't sure whether a lifestyle profile is suitable for your needs, you should get financial advice. There’s likely to be a cost for this.

If you haven't invested in a lifestyle profile, you should consider when you need to start reducing your exposure to risk. This is because your money won't be automatically moved into funds that aim to prepare your pension savings for how you plan to take your money in retirement. If you're not sure what to do, it's best to get financial advice.

If you would like information on lifestyle profiles please read the How to choose the right investment options for your pension guide (PDF, 740kb).

Why reduce risk?

Changes in the value of your pension can mean that the level of income you expect to receive may be reduced.

If you choose to keep your money invested and take a flexible income, you need to remember that your investments may not perform as well as you expect them to – they can go down as well as up in value. You could also run out of money if you withdraw too much or if you live longer than expected.

The level of guaranteed income you buy can affect your income for the rest of your life. The cost of buying a guaranteed income will fluctuate, based on things like long-term interest rates.

So, as you approach retirement you may want to consider investing in a way that will reduce risk.

When to reduce risk

As a general rule 5 to 15 years from your retirement date is considered a good time to start regularly reviewing your investments and reducing risk.

You should consider how you want to turn your pension savings into an income, the value of your pension and how far off your pension target you are. For example, if you’ve already reached your pension target you might want to reduce risk sooner.

However, you can choose to change your investments, or change how you plan to take income from your pension, at any time. If you’re unsure, then it’s best to get financial advice.