How should I invest when I want to retire soon?

Question

You may  take some of your pension savings as cash when you're 60 (25% is tax free), keep some invested in a 'drawdown' pension and then trade it all in for an annuity when you're older.

Holly Mackay · Accepted Answer

First up Richard, I can't give you financial advice. I'm not a qualified adviser and also I don't know your full financial picture. So I am just sharing some food for thought here - hope it helps you to make the best decision for you.

Yours is a really common question and a very hard one at that.

It is a bit like asking me if you should go ski-ing again aged 50. The odds suggest that you will be fine. But the older you get the riskier it gets, and the greater the chances of any broken bones doing more damage and taking longer to heal. But would you say to any 50 year old friends that they shouldn't go ski-ing? Probably not. But if they break a bone, they'd be bloody unlucky and you'd feel guilty. Welcome to my world!

Loads to say.

First up:
Your timeframes. You are only 50. And there is no rule to say that when you hit 60 you need to take all your money out of the stock market.

In retirement we have 2 basic choices. We take our retirement savings and trade them in for a guaranteed and fixed annual income till the lights turn out. (An annuity). OR we keep invested in the stock markets, typically taking a lump sum on retirement and then drawing down a regular chunk every month or year to supplement our income (Drawdown).

Annuities are certain. But right now with interest rates so low, you don't get much and you prevent any potential upside (and of course downside) from markets. As a rule of thumb, take your pension savings and divide by about 20 or 25. That's a rough guide to how much you'd get a year if you buy an annuity.

However, if you live to 90, for example, 30 years from 60 to 90 is quite a long time to lock yourself out of the stock market. So don't assume that these next 10 years are all you have left to be in the markets. You may of course take some of your pension savings as cash when you're 60 (25% is tax free), keep some invested in a 'drawdown' pension and then trade it all in for an annuity when you're older. So maybe revisit your assumed timeframes for continuing your relationship with the stock market?