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Help! I’m about to retire: what’s the plan?

You’ve had enough of the rat race and you’re ready to wind down. Now you’ve decided it’s time to retire, how do you replace your salary to make sure you can enjoy your retirement for as long as it lasts?

| 9 min read

When we talk about retirement, the focus seems to always be on saving for a sunny day. That time in the future when you can leave work behind and enjoy your leisure years. But the decisions you make now, on the threshold of your third age, will be among the most important you will ever make.

What you decide now will set the tone for the rest of your life so having the right guidance and advice can be invaluable.

If you‘re about to retire – or want to but aren’t sure if your finances are ready – ask yourself the three questions below:

  1. How much retirement income will I need?
  2. How much can I rely on?
  3. What’s the best way to take my pension income?

1. How much retirement income will I need?

This depends on what you plan to do in retirement. You’ll have a lot of spare time on your hands, and you’ll want to fill your days. Will you make more use of your annual memberships? Will you be starting new hobbies? Will you want to travel or go to the theatre more frequently?

According to research from the University of Loughborough and the Pensions and Lifetimes Savings Association a very basic retirement lifestyle in 2023 cost around £14,400 if you live on your own or £22,400 if you’re a couple. A moderate retirement will cost £31,300 and £43,100 respectively, while a comfortable retirement will cost £43,100 and £59,000.

2. How much can I rely on?

If you qualify for the New State Pension in full you can expect to receive £11,502 a year, which meet about three quarters of your basic needs if you live on your own.

A retired couple should have a bit of money left over. But the qualification rules are complex. We recommend checking your State Pension forecast if you haven’t looked for a long time.

But remember you cannot claim the State Pension until you reach 66 in 2024.

If you belong to any employer-sponsored defined benefit schemes these will pay you a fixed pension based on your salary and the number of years you worked at the company. Your latest annual statement should tell you what you could receive. However, the actual income can be affected by things like your age when you start to take your pension. But you can write to the trustees for a personalised quote.

Some employer schemes allow you to claim your pension before the State Pension Age, but remember any income you receive will have to cover all your expenses unless you plan to work until you can retire fully. That’s one benefit of the retirement rules: the ability to generate more leisure time and ease yourself into retirement.

The State Pension and any defined benefit schemes will give you some idea of how close you are to meeting your retirement income needs. We now need to think about how to make up the gap from your workplace defined contribution schemes and private pensions such as a Self-Invested Personal Pension or SIPP (where retirement income depends on what’s paid in and any returns), any investments such as ISAs or general investment accounts (GIAs), and your savings.

3. What’s the best way to take your pension income?

When thinking about how much income you need to generate you have four options when it comes to your defined contribution and personal pensions:

  • purchasing a guaranteed income in the form of an annuity,
  • leaving it invested while taking an income (known as ‘drawdown’),
  • taking lump sums,
  • a combination of these

General Investment Accounts (GIAs) and Stocks & Shares ISAs are also helpful in planning your retirement income strategy. ISAs can be a way of generating tax-free returns, while GIAs generate very limited tax efficient returns but can be useful if you need a joint investment account between partners.

Pension income options

1. Purchasing an annuity

    This is the way people used to use their pension savings and was the only choice for many years. In return for an up-front lump-sum payment, an insurance company promises to provide a guaranteed level of income for the rest of your life. You can opt to have the payments increase in line with inflation, and you can choose to have a reduced income paid to a surviving spouse or civil partner on your death. Both of these will come at a cost of a lower level of starting income.

    If you want the peace of mind that comes with knowing all your basic needs will be covered for the rest of your life, annuities can play a very useful role in your retirement planning. Using some of your pension savings to buy one can therefore make sense.

    However, annuity rates are based on bond yields and have been poor value for much of this century due to low interest rates and yields. But if you’re retiring soon, you might get an attractive quote with rates higher than they have been for much of the past decade.

    2. Pension drawdown

    Drawdown offers extra flexibility and the potential for better returns and more income over time. Your pension pot remains invested retaining the potential for tax-free long-term growth. If you haven’t taken your 25% tax-free lump sum, the first 25% of any withdrawal is tax free with the remainder counting towards your taxable income. However, the 25% tax-free amount is limited to £268,275 over your lifetime. Otherwise, every part of the withdrawal is taxable.

    However, the value of your investments will continue to change over time so you need to be careful about how much you draw out and when to ensure you leave enough for future needs. For example, making a large withdrawal just before or just after a fall in markets can make it harder for your investments to recover. When you are drawing from a portfolio it is not just the long-term average return that matters but the sequence of returns.

    Our drawdown calculator may assist you in your planning. It aims to provide an indication of the extra pension income needed to fund your retirement lifestyle, so you can see if you are on track.

    Managing a portfolio to provide income effectively can be much more complex and challenging than investing for growth. An appropriate, sustainable withdrawal strategy is as important as a sensible investment strategy – if not more so.

    Read more: What's the best way to invest after retirement?

    3. Uncrystallised Fund Pension Lump Sums (UFPLS)

    This can be the simplest way of accessing your pension savings if you are looking to take a large withdrawal. Rather than setting up regular income payments, you withdraw money on demand as and when you need it. The first 25% of each withdrawal is tax free and the rest is taxed as income.

    You cannot use your pension in this way if you have already taken a 25% tax-free lump sum or used some of the money to buy an annuity. But it means you can put off making a big decision – like buying an annuity or taking regular income – whilst still accessing your wealth.

    As with drawdown, taking too much in one go could leave you without enough savings for later in your life and you could miss out on potential growth.

    Who do I talk to about retirement?

    There are free resources such as the government’s Money Helper website. But if you'd like something more tailored to your situation, our 'At Retirement' financial plan could help.

    Each of our Financial Plans provides guidance and streamlined advice around a commonly asked financial question for people without complex needs. You’ll get one-on-one support from a qualified financial planner, who can help you take control of your retirement.

    The ‘At Retirement Plan’ can help you:

    • Figure out when you could afford stop working and how much retirement income you could generate
    • Take control of your different pensions as well as any other savings and investments
    • Create an income plan that makes the most of your tax allowances
    • Help you think about the best ways to close any funding gap should one arise

    OneStep Financial Plan

    Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

    Guide to the retirement of your dreams

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