How to prepare your investment portfolio for retirement
By Boring Money
10 Mar, 2025
This content is a paid promotion and has been created in collaboration with AJ Bell. It is an advertorial designed to promote the AJ Bell Self-Invested Personal Pension (SIPP). While we strive to ensure the information provided is accurate and relevant, it reflects the views and messaging of the sponsor.
Retirement is creeping closer. No more Monday morning alarms, no more office politics, and - if you get your investment strategy right - no money worries either. But as you move from full-time earning to full-time spending, your portfolio may need a serious reshuffle. The name of the game now? Stability, sustainability. Here’s how to prepare your investment portfolio for retirement.
Time to dial down your risk exposure
Earlier in your investing journey, you might have taken more risks - stacking your portfolio with stocks, hoping for high returns, and riding out the market’s mood swings. But as you approach retirement, it’s time to play a bit more conservatively. You don’t want a market crash wiping out your savings just as you start dipping into them.
That doesn’t mean ditching stocks entirely. Shares still have a role in keeping your pot growing, especially as people are living longer these days. But it’s about balance. A gradual shift towards traditionally lower-risk assets like bonds, gilts, and even a bit of cash can help cushion the blow of any market turbulence. Think of it like putting stabilisers on your financial bike - still moving forward, just with less chance of falling off!
One approach to managing risk is the “glide path” strategy, which means gradually reducing your exposure to stocks and increasing allocations to less volatile (“risky”) assets. For example, if you have 80% in stocks and 20% in bonds when you’re 10 years away from retiring, you might aim to shift to 60/40 over the next five years, then settle on 40/60 as you reach retirement.
If you’re going to transition your investment strategy in the approach to retirement, you also need to decide when to start the switch. There’s no hard and fast answer but conducting a pension review 10 years before retirement is normally a good idea, first to check you’re on course to meet your retirement goals, but also to consider your investment strategy going forward.
When it comes to adjusting your portfolio ahead of retirement, you’ll want to make sure your savings are in the best home – with the choice of investments, fair fees and all the guidance and support you may need when tweaking your pot. Head to our handpicked list of the Best Pensions in 2025 to see the top providers on the market this year.
Diversification: Don’t put all your eggs in one basket
If your investments are all in one place (whether that’s a single company, one sector, or even just the UK stock market) you’re taking a big risk. Diversification is your financial safety net, spreading your investments across different assets so that a wobble in one area doesn’t mean disaster for your whole portfolio.
A solid mix of stocks, funds, bonds, commodities and even property can help smooth the ride. And don’t forget about geographical diversification. The UK market might feel familiar, but there’s a whole world out there – literally! Equally, while the US economy is on the tip of every investor’s tongue these days, it’s not the be-all-and-end-all. Global investments can help balance things out if any one economy hits a rough patch.
It’s also worth considering dividend-paying stocks. These companies tend to be more stable and provide a steady stream of income to investors, which can be useful in retirement. Similarly, index-linked funds and ETFs offer broad exposure to entire markets and industries, keeping your costs low while reducing reliance on any single company’s performance.
Many providers offer a large range of investments to customise your pension portfolio to your liking. AJ Bell’s SIPP, for instance, gives investors access to stocks, funds, Investment Trusts, ETFs and more – with fees as low as £1.50 per transaction, so you can pick and mix while keeping your costs low.
Lifestyling: The auto-pilot option
Some workplace and Self-Invested Personal Pensions (SIPPs) offer a handy feature called “lifestyling”. This means your investments are automatically adjusted as you near retirement, gradually shifting towards lower-risk assets. If your pension plan has this option and it fits your retirement plans, it can be a simple way to manage risk without too much effort on your part. It's especially relevant for those that intend to purchase an annuity (a guaranteed retirement income - more on this later).
However, lifestyling isn’t a one-size-fits-all solution, and is even considered by some to be an outdated strategy. If you’re planning to keep your pension invested and draw an income over time (instead of taking it all out at once) - otherwise known as “drawdown” - lifestyling probably isn’t right for you. In this case, keeping a higher percentage in shares might make more sense to give your remaining pot the best chance of growing and lasting longer.
The idea of ‘lifestyling’ your pension was born in a world where the vast majority of people bought an annuity at age 65. The world has completely changed since the pension freedoms were introduced in 2015, with most people taking an income through drawdown to suit their needs and accessing their fund at a variety of ages. Lifestyling works much less well in these circumstances and can have disastrous consequences if the strategy doesn’t match your retirement income plans, as we saw in the wake of the mini-Budget in 2022.
If your pension provider doesn’t offer lifestyling but you still want to tone down your risk exposure, you can DIY your own de-risking strategy by periodically rebalancing your portfolio. Many providers allow you to do this on your own terms. For example, AJ Bell’s SIPP lets you manage your pension investments manually, allowing you to adjust your strategy to your liking with ease online or via the mobile app.
How you plan to take your pension matters
As we’ve just touched on, your investment strategy is heavily influenced by how you plan to access your pension. There are a few different ways to do this, and each one requires a slightly different approach.
Investing for an annuity
An annuity provides a guaranteed income for life once you retire. The idea is once you buy one, investment risk is no longer a concern, as your income is already planned out years in advance.
If you’re planning to buy an annuity, your investment strategy should focus on protecting your pension pot from market downturns in the final years before purchase. This is because the terms of your annuity are based on the value of your pension pot – the larger your pot, the larger your annuity payments can potentially be.
This is where lifestyling is particularly useful to wind down your risk exposure and focus on preserving your pot before you lock in your annuity rate. Traditional strategies involve increasing your exposure to very low-risk assets such as government bonds.
As with all retirement planning matters, it’s a prudent idea to get in touch with a financial adviser to assess your plan and point you in the right direction.
You can also use part of your retirement savings to purchase an annuity and leave the rest invested – in which case, the below guidance may be helpful.
Investing for pension drawdown
If you’re going for drawdown, where your pension stays invested while you withdraw income, you’ll want to aim for a mix of growth and stability. Keeping some exposure to the stock market can help your money last longer, while having a cash buffer (to cover, say, two to three years’ worth of expenses) can stop you from having to sell investments at the wrong time.
One way to manage this is by using the “bucket strategy”. This involves dividing your retirement savings into three separate buckets, each one invested in different assets with different risk levels, so that you can ensure your pension has you covered for all eventualities. Here’s how this might look:
Short-term bucket (0-3 years): Invested in cash and high-quality bonds you can cash in quickly to cover any immediate expenses.
Medium-term bucket (3-7 years): A mix of bonds and dividend-paying stocks to provide an income without compromising on stability.
Long-term bucket (7+ years): Stocks and other growth-focused investments to help beat inflation and encourage your pot to grow over the longer-term.
For most people, the key aim in drawdown will be to generate a sustainable retirement income that delivers the standard of living they want. This will usually involve having a chunk of cash in your portfolio to pay that income, with the rest of your fund invested for the longer-term with the aim of delivering growth.
In terms of how much of your portfolio you should allocate to each bucket, it really comes down to your individual circumstances – your age, your tolerance for risk, and even your life expectancy. Pinning this down can be tricky so do contact a qualified financial adviser if you need assistance in carving it all out.
Investing for a lump sum withdrawal
If you’re taking a big lump sum, you’ll want to be extra cautious. Large withdrawals can eat into your pension quickly, and the last thing you want is to be forced to sell investments when markets are down. Gradually shifting into lower-risk investments before retirement can help you manage this.
You’ll also need to think about tax efficiency. You can only withdraw 25% of your pension pot tax-free - the rest is taxed at the relevant rate of Income Tax. If you’re taking a large sum, it might push you into a higher tax bracket and land you with a bigger bill. If you’re worried about this, you can spread your withdrawals over multiple tax years to help keep your tax bill as low as possible.
Again, lump sum withdrawals can be quite complex to plan ahead for, as there are many eventualities to consider – from keeping your tax bill as low as possible to ensuring you don’t gobble up your savings too quickly. Make sure you run your plan by a financial adviser before you get started.
Taking a big lump sum from your retirement pot is an option that shouldn’t be taken lightly, as you may pay extra income tax, reduce your tax-free pensions allowance and face challenges making the rest of your fund last throughout your retirement. It is critical you have a clear plan for any money you access from your pension – simply sticking it all in a bank account can leave you with the double-whammy of paying extra tax and then seeing the real value of that cash eaten away by inflation.
Keep checking in
Retirement planning isn’t a set-it-and-forget-it deal. Things change - markets move, tax rules change, and your own spending needs might evolve. Regular check-ins on your portfolio (at least once a year) will help ensure your investments are still working for you.
This is where you might have questions for your pension provider, so their customer service credentials are especially important. Not all providers will be stellar in this department though. AJ Bell was one of the winners of our coveted Best For Customer Service Award in 2025 – check the shortlist to see who else made the cut this year.
Customer service aside, understanding tax implications is also key, and this can evolve over time depending on the way you withdraw your pension. Getting to grips with tax-free allowances and drawdown strategies can make a big difference, so a chat with a financial adviser could be money well spent if it helps you avoid costly mistakes.
Final thoughts
All in all, the years leading up to retirement are critical for getting your investments in order. You don’t want to take too much risk, but you also don’t want to play it so safe that inflation eats into your savings. A sensible mix of reducing risk, diversifying, and aligning your investments with your retirement income strategy will put you in a strong position.
With a bit of planning, you can make sure your pension pot works as hard for you in retirement as you did to build it up in the first place. And then? It’s time to enjoy the rewards of all those years of saving and investing - whether that’s travelling the world, spoiling the grandkids, or just enjoying a well-earned lie-in!
