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  • How should I invest my pension for income or for my loved ones?

    We take a look at the different approaches to taking income from a pension or investing it for loved ones

    Last Updated: 1 January 2003

    Your investments are important for your retirement, so it’s vital you get the right mix.

    If you choose to take your pension via drawdown, where you pick your own investments, it’s important to think about your strategy for taking an income and your goals for the future.

    The strategy you choose is likely to depend on factors like:

    • How much income you need
    • How long you need your pension to last
    • If you want to pass your pension on to loved ones
    • Your investment performance

    If you need an income from your drawdown pension which needs to last your whole retirement (maybe 30 years or longer), you may need to be very cautious with your withdrawals.

    The same is true if your priority is to have money left over to pass on to loved ones.

    If your investments perform poorly, you may want to lower your withdrawals, so your portfolio has an opportunity to recover.

    One thing to consider with investments held in a Self-invested personal pension is that they usually aren’t subject to inheritance tax.

    If you pass away before you turn 75, the beneficiary will usually inherit anything held tax free. After the age of 75, any withdrawals they make will be taxed at their marginal rate of income tax.

    It could be more beneficial to hold investments in a pension.

    This is because inheritance tax is 40% once you go over the nil-rate band of £325,000 (possibly up to £500,000 if the residence nil-rate band is included).

    There are three main approaches to consider when investing in drawdown.

    This article isn’t personal advice. Investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. Pension and tax rules can change and the value of any benefits depend on personal circumstances.

    Taking only the income your pension produces

    If you need an income from your drawdown pension, you’re less likely to run out of money if you stick with this strategy.

    Also known as taking the natural yield, this means you only take the income earned from your investments (which could include the interest paid from bonds and dividends awarded from shares, as well as the funds that invest in them).

    You don’t sell investments to fund your income.


    • Improves the chances of a growing pension over time that should also provide an income (which could be very important if you want your income to last for a long time and/or you want to pass money on to loved ones)
    • Means that the income your investments give will go up and down in value, it could reduce or even stop
    • Means you may be taking less income than possible, by not selling your investments, so potentially giving yourself a poorer standard of living

    Taking a planned income

    If you need an income but you don’t think the natural yield will be enough, you might consider selling your investments to fund your withdrawals (also known as drawing from capital).

    The amount you sell and withdraw is up to you. But it’s likely to depend on how much income you need, how long you need your pension to last, the performance of your investments and how much you want to pass on to loved ones.


    • Means you could receive more income than you would have by just taking the natural yield
    • Creates a much higher chance of running out of money
    • May mean you have to significantly reduce your withdrawals after a market downturn
    • Will damage your portfolio’s ability to recover if you continue to sell your investments after they’ve fallen in value
    • Could leave you short of income in the future if you sell too much
    • Means your income and the value of your investments could still increase over time, but only if you’re cautious about how much you withdraw

    Taking no income

    You might just take your tax-free cash for now and put off making other withdrawals until a later date. This could be a tax efficient way of topping up your income if you’re winding down your hours at work. You could even use it to pay off debt, like your mortgage, if you want to reduce your outgoings.

    You might be interested in funds which aim to grow over the long term.


    • Means you could increase your pension value and available income over time as you leave it to grow. Though there’s no guarantee that investments will grow, they could fall in value
    • Makes it more likely your loved ones could have more to inherit
    • Means you risk that annuity rates may be lower than they are now if your plan is to eventually buy an annuity. Though annuity rate falls and rises are hard to predict

    If you’re looking for ideas on where to invest using any of the approaches above, try our Wealth Shortlist, a list of funds our research team has selected for their long-term performance potential.

    Discover the Wealth Shortlist


    One way to get a guaranteed income in retirement is to take out an annuity. It’s then paid for life.

    You can do this before moving into drawdown or afterwards.

    Normally annuities can’t be passed onto a beneficiary. But you can choose to have the income from an annuity paid to a spouse or beneficiary when you die when you take one out. This can reduce the level of income you receive.

    Quotes are guaranteed for a limited time, and once set up an annuity can’t normally be changed.

    Find out more about annuities

    Find out more about annuity options and death benefits

    What you do with your pension is an important decision. You should check you're making the right decision for your circumstances and that you understand all your options and their risks.

    The government's free and impartial Pension Wise service can help you and we can offer you advice if you’d like it.

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