Join our community of smart investors

How to invest as a pension newbie

Tips for managing your portfolio after drawing down your pension
How to invest as a pension newbie

Key Characteristics:

  • Recently drawndown pension 
  • Managing income to last a whole retirement

If you’re newly retired and beginning to take your money from your pension (this is known as drawdown), your portfolio asset allocation will depend on its value, your circumstances and your risk appetite.

Investors with over £1m might be happy with the allocation we have modelled for a portfolio of that size. If you have a smaller sum to last you throughout retirement, a more cautious approach is necessary.

All our other strategic asset allocation models have assumed the portfolios will be managed for total returns, which means that all income has been reinvested to help returns compound away. Retired investors, however, are likely to want to draw the income from their investments to fund their lives.

You can read about the various ways of investing for income in this guide.

The drawdown conundrum

In the investment world, there are two uses of the word ‘drawdown’, both of which are relevant here. Both uses are important to consider when managing a Sipp in retirement.

The industry refers to taking money from your pension as 'drawing down'; confusingly the term portfolio managers use for falls in asset markets from the highest to the lowest point is also 'drawdown'.  

Ideally you want the portfolio to generate enough income to minimise the need to sell holdings to fund your life. You certainly don’t want to be in a position where you are forced to sell assets for income after a market slump. Nor do you want to be overexposed to higher-risk fixed income (such as high-yield corporate bonds) because these carry the greatest risk of default.

Not running out of money in retirement is about financial planning (knowing how much you need and being realistic) and portfolio management (knowing when to run the portfolio for income and when you may need to draw capital) as well as asset allocation. The blend of assets in the portfolio is vital to get the right balance between yield and risk management.

What’s in it?

Cash – 5 per cent

Cash is low in these portfolios, because they are invested to generate an income for a retirement that may last 20 years or more.

Other – 10 per cent

Portfolios could benefit from income asset classes such as real estate, but as these holdings can be less liquid (harder to buy and sell) in recessions, they can be risky: for example, in a recession a property might become harder to generate income from (if rental demand is low) and almost impossible to sell.

Fixed Income – 55 to 60 per cent

Our pension drawdown asset allocation is very similar to the Cautious asset allocation.

We retain a high weighting to this asset class because there is scope for strategic bond funds (which invest smartly in different geographies, in bonds with varying maturities and in a blend of government bonds and high quality corporate credit) to offer capital protection and some real income.

Equities – 25 to 30 per cent

Our allocations to equities reflect the need to invest in some riskier assets, which can pay dividends in good times for the economy. Also, positions in high-quality growth stocks can be periodically pruned on the back of a good run – in effect making your own dividends.

Next steps

Keep on top of your portfolio

These allocations are just a guide, investors increasingly need to think about the grey areas between asset classes. For example, you might choose to give up a portion of your fixed income allocation and give it to the equities allocation, but only use this slice for investmentssuch as listed infrastructure, which tend to be less volatile and pay reliable dividends. Discipline is vital if you do this, however, and you should aim not to be more than 10 per cent ‘underweight’ or ‘overweight’ an asset class from your strategic asset allocation.

Our guide to taking your pension can help you manage your drawdown better.