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Planning your retirement in seven easy steps

Moving into retirement means taking important and sometimes complex decisions regarding your financial affairs.

| 9 min read

You can be young without money, but you can't be old without it – Tennessee Williams

Moving into retirement often means taking some important and sometimes complex decisions regarding your financial affairs. Everyone’s retirement planning roadmap is different, which is why careful planning in the context of your own unique circumstances and goals is imperative. However, these general steps could help with you organise your affairs and equip you for the journey ahead.

1. Gather as much information as you can

As your retirement draws closer, it’s important to have all the facts so you have the best possible plan. A good place to start is by working out what income you can generate in retirement from your pension pots, the State Pension and any other income you may have. Remember to take account of any tax you’ll pay.

Some of your retirement income requirements may be covered by your State Pension, though how much depends on the number of years you have worked and paid full National Insurance (NI) contributions. To see how much state pension you might get, and when you are due to start receiving it, you can use the government’s online tool. For other pensions you have built up over the years look at your pension statement – your provider should send you this once a year. If you have paid into more than one pension pot you will need to contact each provider separately to find out how much is in each one.

A pension from a defined benefit scheme (also known as an employer’s salary-related pension scheme such as a final salary or career average scheme) will provide a certain amount of income depending on your salary and years of service. For personal pensions it will depend on the value of your pot and how much you can then secure via an annuity or draw via pension drawdown, so you should ask for quotations based on your requirements. Remember to shop around for the best annuity deal and check that all the health details you've used to get quotes are up to date. This process can be complex and involve a significant number of options; a financial adviser can help you find the best deal and explain the best options for your circumstances.

Defined benefits schemes were once commonplace, and for some people a combination of these and the State Pension will be sufficient to meet much, if not all, of their retirement income needs. However, few are open to new members today, and people are increasingly reliant on ‘defined contribution’ schemes such as personal pensions to fund retirement. You should receive an annual statement from the trustees of the defined benefits scheme, and you can obtain an estimate of the pension you might receive by writing to the trustees at the address given in the statement.

2. Use a pension ‘calculator’ to determine how much income you might generate

Having accounted for the State Pension and any defined benefit scheme pension, you need to calculate how much money you will need to save to produce the remainder of your target income. This can depend on factors such as the age you want to retire, income yields available on investments, how much prices rise during your retirement and how long you live for – so it’s hard to make a precise prediction. Of course, it also hinges on how much you have put aside already.

Online calculators can help you see if you are on target to meet your retirement objectives, taking into account your current retirement savings and future contributions into defined contribution pensions. It works out how much you might accumulate given current levels of saving, as well as the effects of increasing or decreasing contributions. Calculations have to make a number of assumptions about various factors – so what actually happens could be significantly different – but they do at least give you an idea of what to expect.

The contribution levels produced by the calculator might seem large, but with the assistance of any employer contributions the amount you need to save may be much lower. In addition, when investing through a pension you may also receive tax relief on your contributions. These factors often make pension the most effective means of saving for retirement.

Currently, an investor can receive up to 45% tax relief when they contribute to a personal pension, with 20% paid by the HMRC to the pension and any higher and additional rate tax relief reclaimable. For example, an investor contributes £8,000 into their SIPP and £2,000 is claimed back from HMRC by the pension provider. A higher rate taxpayer could claim back up to a further 20%, reducing the overall cost of the contribution to as little as £6,000. Additional rate taxpayers could claim back up to a further 25% making the cost of a £10,000 contribution just £5,500.

3. Assess your needs

Everyone wants different things from retirement. However, most people want to maintain their standard of living. This typically means requiring less income than during your working life because you are no longer spending money on paying your mortgage or raising children. You also won’t be saving towards retirement. One rule of thumb is that around half to two-thirds of the income you had during your working life is sufficient and a reasonable goal.

4. Check your pensions against the Lifetime Allowance

The maximum pension savings you can build up without incurring a tax charge when you draw out your money (and without leaving a tax charge for your beneficiaries if you die before age 75) is £1,073,100 for the 2021/2022 tax year. If your pension pot is worth more than the Lifetime Allowance, tax is due on the excess amount of 25% on income and 55% on cash lump sums. Defined benefit pensions are usually valued at 20 times the income you get in the first year plus your lump sum – but you should check this with your pension provider.

5. Weigh up how best to take benefits

If you have built up a defined contribution pension (a personal or workplace pension where you have built up your own pension pot) it’s up to you to decide what you do with this. If you’re over 55 you have complete freedom. You can leave it where it is, carry on contributing, use some or all of it to provide yourself with a guaranteed income in retirement (via an annuity), take some or all of it as cash or a combination of these.

The choices you make will depend on your particular situation – how much retirement income you need, what other sources of income you’ll have, your health, how comfortable you are taking risks and how much tax you’ll pay. You can usually take up to 25% of a personal pension as a tax-free lump sum. The rest can be used to provide you with an income and/or irregular lump sums, both of which are taxable as income.

It’s generally a good idea to have some secure income via the State Pension, defined benefit schemes or annuities that you can rely on to pay for basic living expenses and last your whole retirement. Once that’s in place, you can consider more flexible options that can help you adapt to changing needs during retirement.

6. Adjust your investment strategy

In addition to any pension drawdown you are planning, you may have ISAs or other investments that you are planning to use to generate income. Ahead of retirement these will need to be reviewed to ensure the investment strategy and level of risk are appropriate. The asset mix may require alteration, for instance replacing growth-orientated areas with investments that pay a higher level of income. If you invest in funds you may need to substitute units that reinvest income for you (accumulation units) with those that pay it out (income units).

7. Consider advice or guidance

Many pension options cannot be changed after they have been chosen so it’s important you choose wisely. We recommend you take professional financial advice or seek appropriate guidance if you are at all unsure. Having an expert review your situation can give you confidence that decisions made are right for you. A Charles Stanley specialist can take you through your options so that you understand your position, and know what to do next.

What sort of retirement can you afford?

Visit our Options at Retirement Hub, to learn more, or to arrange a free initial consultation with a dedicated planner to discuss how you can make the most of your retirement savings.

Pension Wise, the Government’s free and impartial pension guidance service can also help you understand your pension options.


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.

Planning your retirement in seven easy steps

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The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.

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