How should you invest your pension pot?

This is especially advantageous now, as people are living much longer. By the time you reach 65, your life expectancy currently is 18.5 years for men and 21.1 years for women. The underlying investments will need to keep pace in real terms, as inflation could quickly ravage a static pension pot over such a long timeframe.

"Investing in a spread of predominantly equity-based funds and taking the dividends from the investments as income is a sensible starting point, but each individual's circumstances will be different," says Tom McPhail, head of pensions research at broker Hargreaves Lansdown

Fund and trust suggestions

Other well-respected funds that aim to provide both strong income and capital growth include RWC Enhanced Income, which invests primarily in undervalued UK companies; Threadneedle UK Equity Alpha Income, which invests mainly in UK companies such as utilities; and M&G Global Dividend.

Some investment trusts have been delivering very attractive income - for example, Invesco Perpetual Enhanced Income, New City High Yield and Renewables Infrastructure Group. Take a look at John Laing Infrastructure as well as other social infrastructure trusts such as HICL Infrastructure and International Public Partnerships.

JPMorgan Claverhouse, which aims for capital and income growth from a portfolio of major UK companies, has increased the total dividend paid to shareholders every year for the past 40 years.

Racier Utilico Emerging Markets invests in infrastructure, utility and related sectors, mainly in emerging markets such as China including Hong Kong, Brazil and Malaysia. As usual, there will usually be a compromise between pushing the envelope to obtain a hefty dividend yield and taking some risk.

In the fixed-interest arena, Henderson Strategic Bond fund invests across the international bond market, while the relatively young closed-ended TwentyFour Income fund is heavily invested in residential mortgage-backed securities and collateralised loan obligations.

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It will be important to manage your pension withdrawals to ensure income tax is paid at the lowest possible rate. The new Isa (Nisa) will be simplified to allow investment in cash or stocks and shares, or any combination of the two, up to the maximum limit of £15,000 a year from 1 July 2014. It will be a good vehicle for the retirement phase, as income can be taken tax-free.

"Using the yield from a diversified portfolio of Isas can be a tax-efficient complement to pension benefits," says Darren Pearce, head of high-net-worth relationships at Chase de Vere.

"These could be a mixture of active and passive funds, but the Isa wrapper shelters the income from the taxman. Qualifying VCTs offer income tax relief of 30 per cent and tax-free dividends, but these would only be suitable for clients with a more speculative tolerance for risk. Most clients approaching (or at) retirement tend to be more focused on stable returns, as they are not usually able to replace investment losses or falls in investment income with employment income."

Another option is the new National Savings & Investments fixed-rate savings bonds for those aged over 65, which have a maximum investment limit of £10,000 for each bond. These will be launched in January. The Budget promised 'market leading' rates that will be confirmed in the 2014 Autumn Statement. Indicative rates are 2.8 per cent gross AER on a one-year bond and 4 per cent on a three-year bond.

Another development announced in the Budget is that pension providers will offer free advice, in the form of what is being rather grandly termed a "guidance guarantee", at the point retirees choose to draw benefits. While the Budget's statement that "individuals approaching retirement will receive free and impartial face-to-face guidance to help them make the choices that best suit their needs" sounds like personalised advice, it's unlikely that it will be. To be affordable the advice will probably have to be fairly generic.

This article was written for our sister website Money Observer

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