If you’re considering opting for a drawdown as a way to access your pension, you’ll need to give considerable thought to how and where you’re going to invest the money. There are various approaches to investing in drawdown, and the strategy you choose will largely depend on your confidence levels, financial knowledge, and overall objectives. This article aims to provide a comprehensive overview of four popular investment methods for pension drawdown.
1. The Self-Investor Approach
Over recent years, pension drawdown has become an increasingly popular choice for pension income withdrawal. This has led to a surge in the number of individuals who choose to manage their own investments. Self-investing can be a cost-effective option if you understand the financial market well and are confident in your decision-making abilities.
Many companies offer Self-Investment Personal Pensions (SIPPs) for self-investors, providing useful tools such as fund research facilities, information resources, and online trading. Some well-known providers include Hargreaves Lansdown, Tilney BestInvest, and Fidelity.
It’s worth noting that while the self-investor approach can help save money on professional fees, it also carries a higher risk. If you’re not experienced or knowledgeable in investing, you may make poor investment decisions that could negatively impact your pension.
2. Using a Financial Adviser
If you’re interested in the flexibility of pension drawdown but lack confidence in picking your own investments, a financial adviser can provide valuable guidance. The benefit of using a financial adviser is their expertise in the market. They deal with pension providers and investment houses on a daily basis and can recommend the most suitable plan and investment portfolio for you.
A good financial adviser will take the time to understand your needs, explain how investment funds and drawdown work, assess your attitude towards investment risk and recommend a suitable drawdown plan based on their findings. This method does incur a fee, but it may be a worthwhile investment to ensure you make informed decisions regarding your pension.
3. Non-advised Drawdown
Some providers offer a non-advised pension drawdown service designed for those who don’t want or need professional financial advice. This service typically provides information on various options and pre-constructed portfolios, allowing clients to choose a portfolio that best aligns with their needs.
While this option offers a straightforward way to use drawdown, it’s important to note that the choice of funds is often significantly limited. This can restrict potential growth in rising markets. Additionally, while there is a charge to set up a non-advised plan, there is no recourse or compensation if the wrong investments are chosen.
4. Using a Discretionary Fund Manager
Traditionally, this option has been favoured by those with larger pension funds. A discretionary fund manager will build a customised investment portfolio based on your risk tolerance and strategic objectives. They have the authority to adjust your investment portfolio without prior consent, enabling them to respond quickly to changing market conditions.
This option is typically more expensive than using a financial adviser and usually requires a minimum fund value of £250,000. However, the service is more personalised, and many clients find value in having a direct relationship with the manager handling their money.
Other retirement options
Of course, if you want a guaranteed income instead of income drawdown you could opt for an annuity. The way you take your retirement income is a personal choice, and you should not follows what friends or work collegues do as their circumstances are different to yours. With both options you can tax-free cash; its want happens to the rest of the fund where the choice matters. Invest your pension and take an income flexibly or use your pension to buy a guaranteed income for life.
In conclusion, pension drawdown carries inherent investment risks and requires a good understanding of the financial market. It’s not a suitable option for inexperienced investors or those who are risk-averse. Given that pension funds are often the largest and longest-term savings plan for many individuals, it’s crucial that they are managed correctly during retirement.
If you’re unsure about the best way to proceed, we recommend speaking to a financial adviser to help you choose or using resources like Pension wise to explore your options. As a financial adviser, I can help guide you through the complexities of pension drawdown and help you make informed decisions that align with your financial goals.