Investing gives you flexibility that buying a traditional lifetime annuity can’t match. This is because of the various sources of income available through investing, as well as the option to flex your income or stop it entirely to suit you.
There are three major sources of income from investing – dividends, interest, and capital withdrawals.
Unlike buying an annuity, investing means you still get access to your money. This appeals to those who value the option of accessing their money, taking extra income, or leaving a legacy for loved ones.
This article isn’t personal advice. The government's free and impartial Pension Wise service can help you and we can offer financial advice if you’d like it.
Remember, you can normally access money in a pension from age 55 (57 from 2028). Investments, and any income from them, will go up and down in value, so you could get back less than you put in. Past performance also isn’t a guide to future returns.
Should you consider an annuity?
Absolutely. Most annuities offer a guaranteed, regular income for life. They’re well suited to cover your essential long-term expenses, like housing costs and household bills.
Securing a predictable income stream for these costs can give you more flexibility to invest for other goals with any excess money you have. This is where there’s the potential for growth.
Just remember though, you can't usually change or cancel an annuity once it's set up.
When to invest in retirement?
If you have cash or excess savings that you know you won’t need in the next five years, investing could be an option.
This gives your money a good chance to try and beat inflation over the long term. Over a period of five years or more, investments usually give you a higher return compared to cash savings. Although unlike cash, investments can rise and fall in value so you could get back less than you invest.
It’s important to make sure your essential income needs are covered first before you invest for growth. Having one to three years’ worth of emergency savings in retirement is also a good idea.
How funds can help generate an income in retirement
By investing through a fund, it doesn’t have to be complicated. A professional fund manager will select a diverse range of investments, helping to spread the risks of investing across different investments, sectors and parts of the world.
Some funds focus on providing a higher level of income, others on growing your money, and many aim to offer a mix of both.
Enjoying any income produced without selling the investments themselves is known as taking the ‘natural yield’. This can help preserve your invested money, making future income more sustainable.
You have the flexibility to supplement your income with capital withdrawals. But remember that this could leave you with less money invested, so any future income might be lower as a result.
You can adjust your strategy as necessary to focus on generating higher income today or growing your investment for the future.
You should understand the specific risks before investing in a fund, and make sure any new investment forms part of a diversified portfolio.
How to get the balance right in retirement
Investing for retirement income is about balancing security and growth. There’s no right answer – just what fits right for you.
To start, think about the lifestyle you want in retirement and how much income you’ll need every year to achieve it. Consider the balance between your essential costs, fixed costs and the amount which will vary as your lifestyle changes over time.
It’s also worth thinking about how your State Pension and any other sources of income will contribute to reaching your goals.
You can check the latest annuity rates so you know what kind of guaranteed income might be available to you – just remember that these change over time though and quotes only last for a limited time.
Finally, consider which investments might be best suited to your income goals.
Here are 3 income fund ideas that can help.
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
NEW – HL Global Equity Income Fund
This fund aims to give investors a monthly income that’s managed by HL’s expert investment team.
They’ve selected who they believe are some of the best global equity income fund managers in the market right now to pick stocks.
The fund’s globally diversified, including higher-risk emerging markets, and aims to provide an income, dividend growth potential and long-term capital growth.
All investors need to do is choose whether to receive any income from the fund or re-invest it.
HL Income Fund
The HL Income fund also offers investors a regular income and the potential for capital growth over time.
The fund is run by HL’s expert fund management team and invests in a mix of global investments including bonds and shares. It also invests in smaller companies which adds risk.
HL UK Income Fund
This income fund focuses on one of the best places for income historically – the UK stock market.
Like the HL Global Equity Income Fund, HL’s experts have hand-picked a team of external fund managers who they believe offer the best potential for long-term performance.
This fund also aims to deliver both a regular income and long-term growth.
However, as the focus is on UK companies, investors could benefit from investing in other countries too. This fund invests in smaller companies too, which adds risk.
These funds are managed by Hargreaves Lansdown Fund Managers Ltd., part of the Hargreaves Lansdown Group.