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 two ways of turning your pension savings into an income - buying an annuity or taking income drawdown.

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 that prepare your pension savings for retirement. Lifestyle profiles are usually a suitable option if you want to purchase an annuity at retirement.

However, if you haven’t invested in a lifestyle profile, then 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 prepare your pension savings for retirement.

Why reduce risk?

As you near retirement, changes in the value of your pension can mean that the level of income you expect to receive from flexible income (drawdown) and guaranteed income (annuity) may be reduced.

If you choose a flexible income you should consider the risk of investments performing poorly. You could run out of money if you withdraw too much or you live longer than expected.

The level of annuity you buy can affect your income for the rest of your life. The cost of buying an annuity 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 this risk.

How do you reduce risk?

One of the ways that you can reduce risk is by moving your money into funds that can help prepare your pension savings for retirement. Some options - like lifestyle profiles - will automatically do this for you.

If your money is not invested in a lifestyle profile then you can ask to change your investments to funds that are designed to prepare your pensions savings for retirement. If you're not sure what to do, it’s best to get financial advice.

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 the level of risk around the income that your pension will provide, at any time. If you’re unsure, then it’s best to get financial advice.