Retirement investing in the UK

What is retirement investing?

Retirement investing is the act of strategically investing money into bonds, stocks or retirement accounts, with the view of building wealth over time to establish a financial foundation for your retirement. Unlike saving where you set your money aside, investing can allow your money to work harder and generally offers greater returns, although this can never be guaranteed.

When it comes to investing for retirement, the earlier you start the better. Not only does this help mitigate any risks if the market turns against you, but it also enables you to benefit from compounding. This is when the returns you earn on your investments begin to generate their own returns. The earlier you start, the more time there is for compounding to take effect.

How to invest in your retirement with us

1. Learn more about retirement investing and choose the right retirement account
2. Download the IG Invest app or open a share dealing account online
3. Select your investments
4. Monitor your investments

With us, you can also set up your own SIPP account or ISA as part of a diversified retirement portfolio.

Key investment accounts for retirement

Workplace pensions

Workplace pensions are set up by your employer. Typically, both you and your employer will contribute a percentage of your salary each month to your pension fund. These combined contributions can make it one of the most effective ways of investing for retirement. To help it grow over time, many workplace pensions invest your money into a range of assets on your behalf, but you can choose to manage this yourself if you’d rather.

SIPP

A Self Invested Personal Pension (SIPP) enables you to take control of your retirement investments. It’s often more flexible than traditional workplace pensions and allows you to choose from a wide range of investments including individual stocks and funds.

ISAs

ISAs can offer tax-efficient ways of saving which can be a great way to complement your pension. With an ISA, you don’t have to pay tax on the interest, dividends or capital gains you earn from your savings or investments. Cash ISAs provide a secure place for savings, and a stocks and shares ISA enables you invest your money in a range of assets to help generate long-term growth. Although they don’t offer the same tax benefits as a pension, they enable you to access your money more easily which can be useful if you need it in the short term. They’re also a good way to help diversify your retirement investments.

Creating your own portfolio

When developing your retirement investment plan, consider creating a diversified portfolio where your money is spread across different types of investments. This also helps manage risk and minimises your exposure to one individual investment which could underperform.

A balanced retirement plan typically includes:

• Income generating investments - these are assets such as bonds and dividend paying stocks that are likely to produce a steady stream of income.¹ They can provide an element of stability and helps to preserve the value of your pension.
• Growth investments - these are assets such as stocks, equity funds and real estate that are likely to increase in value over the long term. Although it can’t be guaranteed, these investments tend to offer greater returns than cash savings and are a good way to help your pension stay ahead of inflation.²
• Cash - although cash has a more limited growth potential, it’s good to keep a certain percentage of your retirement savings in cash as it allows easy access to funds to help cover short-term needs or emergencies without having to sell other investments at the wrong time.

By combining these different types of investments, your portfolio may be better positioned to steadily grow whilst managing risk.² As you approach retirement and your circumstances change, you can adjust the balance between growth and income generating investments to align with your goals and risk tolerance.

Retirement investing pros and cons

Pros:

• Tax advantages - many retirement accounts offer tax advantages, so more of your money stays invested and working for you. This can help your investments to grow faster.
• Long-term growth potential - although your retirement investments may fluctuate in value, starting early gives your money the opportunity to grow over decades and benefit from market growth and compounding.²
• Protection against inflation - although they’re considered higher risk, growth focused investments like shares have the potential to outpace inflation and help preserve your purchasing power throughout retirement.²
• Flexibility of investment choice - most retirement investment accounts offer a level of flexibility where you can tailor your portfolio to suit your risk tolerance and goals.

Cons:

• Risk- all investing carries a certain amount of risk and it’s possible that the value of your retirement investments decreases and you may get back less than you originally invested.
• Market volatility- financial markets can experience price fluctuations that cause the value of your investments to decrease in value. These ups and downs can feel unsettling, particularly if you’re approaching retirement.
• Access restrictions- retirement accounts often restrict when you can access your money and impose an age limit of around 55 to 57.³ Although this helps ensure your retirement investments are used for their intended purpose, it also reduces flexibility if you need the money sooner.
• Uncertainty of future rules- government policies and tax rules around pensions could change over time and this may impact how much how much you can save and when you can access your retirement investments.

Managing risk in retirement investing

Diversifying your portfolio

Spreading your investments across asset classes, regions and industries can help reduce the impact of a single investment or sector performs poorly. It’s therefore important to have a retirement investment plan that holds a mix of asset classes, stocks and retirement accounts.

Taking a long-term approach

Investing for retirement is about long-term growth that happens over decades. Financial markets can be volatile, and prices may drop from time to time. When this happens it’s important to stay focused on your long-term goal and ride out any periods of temporary volatility and market downturns if you believe it has long-term growth potential.

Planning for a long life

You may need income into your 80s or 90s and your retirement investment plan can account for this. Balancing safer assets with ones that are likely to continue growing throughout your retirement is a good way to overcome this and help protect against the risk of you outliving your pension.

Regularly reviewing your portfolio

Regularly checking your retirement investments enables you to make sure that your investments are still in line with your goals, risk tolerance and time horizon so you can make any changes if necessary. Frequent checks enable you to make sure that your retirement investment plan stays on track as much as it can.

Conclusion

When it comes to developing a retirement investment plan there’s a lot to consider. By choosing the right accounts that suit your risk tolerance and financial goals you can gradually build wealth and hopefully build a strong financial foundation for your retirement.

Footnotes:

¹ please note that dividend payments are never guaranteed. A company may decide to stop paying dividends at any given point

² please note that future gains are never guaranteed and there’s always the possibility that you could lose money

³ based on current guidelines and subject to change