We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Derisking a pension – options you have in the run up to retirement

We look at what options you have in the years before retirement to de-risk your pension and how to make the most of them.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Many people’s pensions are invested using funds. This could be with a fund their pension provider has chosen or runs, or funds they’ve picked themselves.

The standard approach to retirement planning has typically been to mainly invest in funds that invest in shares while you’re young. Then as you get closer to retirement, to gradually de-risk your portfolio by choosing funds that invest in a mixture of investments including bonds, as well as cash.

The idea is to benefit from the long-term investment returns that tend to come from shares, to build up your pension. This is while also giving yourself time to hopefully ride out the ups and downs that come with investing in the stock market though of course nothing is guaranteed. Then, over time, the shift into bonds and cash can offer more shelter in the lead up to retirement.

This process is known as lifestyling and is usually something to start looking at five to ten years before your chosen retirement date.

A steady shift from shares to bonds the closer you get to retirement is a principle that underpins the strategies of most default pension funds.

In 2020, on average, default investment strategies (in master trusts) allocated more than two thirds (69%) of assets to shares 20 years before retirement.

In Group Personal Pension (GPP) schemes, this was around 66%. This compares to an average allocation of around 20% to cash and bonds in a master trust and 26% in a GPP.

However, as we get to retirement, the scenario flips.

By this point, master trusts on average invest 26% in shares and 67% in cash and bonds. For a GPP, the split was 31% on average in shares and 64% in cash and bonds.

This approach is popular, but it’s certainly not a one-size-fits-all approach.

The shift from shares to bonds is seen as good preparation for buying an annuity.

This article isn’t personal advice. If you're not sure what's right for you, get guidance from Pension Wise, a free, impartial service from the government to help you understand your retirement options, or ask for financial advice. Investments will fall as well as rise in value, so you could get back less than you invest.

How do annuities work?

An annuity is a type of retirement income product that you can buy with some, or all, of your pension. It pays a regular taxable income guaranteed for life, plus an optional beneficiary pay-out.

Often criticised in the past for providing poor value for money, annuity incomes have increased rapidly recently – up well over 40% in the last two years alone.

Rising government bond (gilt) yields and a hike in interest rates have raised annuity incomes significantly. With the possibility of more interest rate increases on the horizon, there’s a chance these incomes could go even higher.

How much could you get from an annuity now?

A 65-year old with a £100,000 pension could now get £7,144 each year compared to £5,940 a year ago on a five-year guaranteed single life, non-increasing income annuity.

Annuities look a lot more attractive now than they have over the last couple of years. However, many are concerned about locking into an annuity rate now and potentially missing out on higher rates in the future.

It’s worth noting that waiting for a higher annuity rate would also mean missing out on those income payments you would get in the meantime. Maybe even missing more than you would have gained from a potentially higher rate. You can calculate the cost of delaying using our Annuity Delay Calculator.

But remember, there’s no obligation to buy an annuity with all of your pension on one day.

You can choose to buy smaller annuities over time throughout your retirement. That way you can secure a guaranteed income to meet your needs as you go along, while leaving the rest invested in the stock market with the potential to grow further if you are happy with this level of risk.

This lets you potentially benefit from higher annuity rates as you age.

You could also qualify for a further boost to your income through an enhanced annuity depending on your health and lifestyle. It’s worth taking the time to enter these details when getting an annuity quote.

Shopping around can help you get the best annuity deal. If you’re 55 or over, you can compare quotes from all UK annuity providers on the open market with our online tool.

The options you choose can impact the annuity income you get. Consider your options carefully as once your annuity is set up it can’t be changed.


The rise of income drawdown

Drawdown has become an increasingly popular choice for people who want to access their retirement savings. It lets you keep your pension invested how and where you choose and make withdrawals when you need to.

This brings into question whether traditional lifestyling strategies work for people in, or planning to use, income drawdown.

If you want to stay invested in retirement and take an income, is a strategy that switches you from shares to bonds in the run up to retirement the right option?

At that point in retirement planning, you’re more likely to want to stay largely in shares to help generate the returns to take an income over the long term.

It’s important that retirees looking to remain in income drawdown are aware of their investment strategy in the years running up to retirement. That’s so you can make sure it meets your needs and you don’t need to make any potentially painful last-minute changes.

One approach to taking an income through drawdown is to take a natural yield. This is where you only take the level of income generated by your investments. This means you’re not touching the capital, so your pension income is more likely to be sustainable long term.

When you start to take an income, the split between shares and bonds you need may be down to your own personal circumstances and levels of risk.

Shares can provide income and growth.

But you shouldn’t forget bonds. For many years bonds haven’t been so interesting, providing low rates of income. However as interest rates have risen recently, the yields on bonds have risen.

As part of a wider portfolio, they can offer diversification, income and something different to shares.

What are bonds and why do they matter?

It’s worth remembering, returns and income from investments aren’t guaranteed.

Dipping into your investments by selling them when yields don’t give you the income you need could leave you short of money later in retirement.

So, drawdown is higher risk than an annuity.

We would suggest holding at least one year’s worth of income as cash to cover any shortfalls in the performance of your investments or any emergency spending.


Looking for investment ideas?

Find share and bond funds our research analysts think offer great performance potential.



Editor's choice: our weekly email

Sign up to receive the week’s top investment stories from Hargreaves Lansdown

Please correct the following errors before you continue:

    Existing client? Please log in to your account to automatically fill in the details below.

    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.


    Your postcode ends:

    Not your postcode? Enter your full address.


    Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.

    What did you think of this article?

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Editor's choice – our weekly email

    Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

    • Latest comment on economies and markets
    • Expert investment research
    • Financial planning tips
    Sign up

    Related articles

    Category: Funds

    The most popular stocks and shares ISA funds in November 2023

    Discover the most popular funds with HL Stocks and Shares ISA investors in November 2023.

    Jason Roberts

    05 Dec 2023 4 min read

    Category: Funds

    HL Select turns 7 – what we’ve learned and what’s next

    HL Select Fund Manager Steve Clayton looks back on seven years of the HL Select fund range, how it’s performed and what’s next.

    Steve Clayton

    01 Dec 2023 6 min read

    Category: Investing and saving

    Investing in healthcare – where are the opportunities?

    The healthcare sector is enormous, absorbing over 10% of the economic output of many developed nations. We take a closer look at the risks and opportunities to watch out for.

    Derren Nathan

    30 Nov 2023 5 min read

    Category: Investing and saving

    How to invest, by the late, great Charlie Munger

    With Charlie Munger’s sad passing, we look back and share some of his most important investment philosophies for investing in the stock market.

    Maike Currie

    30 Nov 2023 4 min read