This article is part of Morningstar's Guide to Retirement Saving. All this week we are arming you with the tools you need to boost your pension pot and secure the best possible income in retirement.
Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today to discuss investing in retirement is Morningstar's Dan Kemp.
Hello, Dan.
Dan Kemp: Hello.
Wall: So we've reached the point in our retirement week special, where we are starting to look not at how you build a pension pot, but what you do when you get to post-retirement, because we still have investment needs post-retirement, don't we?
Kemp: Well, that's absolutely right, and retirement these days of course is becoming a much loser definition seldom do people just stop work and start drawing a pension. So, we have to remember, when we are thinking about a post-retirement pot, that it really came from a pre-retirement pot. So really think about planning through retirement, not to retirement and then starting again.
Wall: A traditional post-retirement portfolio is invested predominately in lower risk assets such as cash and annuities. While a more cautious stance definitely has importance, I think one of the things that's changed a lot since the portfolio theory was invented was life expectancy. So with that in mind, what should we be making of up our post-retirement portfolios off?
Kemp: Well, retirement of course is an incredibly complicated time with different source of incomes coming from lots of different places at different times, so every investor is going to be different, but there are some key things to remember, the first is, as you are absolutely right to say life expectancy has gotten much longer.
People are no longer just investing for five or ten years, they might be investing for thirty years, even forty years in some cases. So it's important to have some long duration assets like equities, as well as shorter duration bonds and cash.
Beyond that, people should also think about tax, because the way that you draw your money to fund your income will differ depending on the vehicle that you are using. So in the background you should be always thinking about the most tax efficient way of investing the money.
Wall: If we, as an example, use the self-invested personal pension that many people use to build up their pension pot with, what happens post-retirement? Does that retain its tax efficient status?
Kemp: Well, it really depends on what you do with it. Of course, those rules have just changed. There has been massive overturning of old pension rules. So if people haven't got advice from their advisee, then they really need to, because it's an incredibly technical area.
But they should think about the way that they are going to invest that pot, because it will remain invested normally. People no longer have to buy annuities as they have done generally in the past. So they are taking control of their pension income rather than passing it to someone else.
Wall: I think one of things we should highlight as well, just because your post-retirement doesn't necessarily mean that your risk appetite has changed. You still need to do the due diligence and make sure that these investments are the right ones for you, the individual.
Kemp: That's absolutely right. We can't assume that all people post-retirement are cautious or aggressive or rich or poor, it's about finding that mix investment strategies that's right for you. As you know, at Morningstar we have done a huge amount of work on the subject looking at the idea of human capital and how that changes through time and really planning not just for retirement, as I said earlier, but through retirement and taking your whole life circumstance into account.
Wall: Dan, thank you very much.
Kemp: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
