10 THINGS TO THINK ABOUT BEFORE YOU RETIRE
The More Time You Spend Preparing For Your Retirement
The Better It Will Be
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OVERVIEW
Think about how you plan for your holidays.
You’ll research flights, accommodation, car parking at the airport, travel insurance, someone to look after your dog…. You’ll buy a guidebook (or look on Instagram) for tips on how maximise your time when you’re there.
Ok, there could be a last-minute border control strike or volcanic eruption in Iceland that causes delays, but your experience has taught you that the better you plan and get organised, the more relaxed you’ll feel in the run-up to your holiday. You’ll maximise your time when you’re there and hopefully create a lifetime of happy memories.
Maximising time and creating happy memories are also the things we want to fill our retirement with, and yet many people sleep-walk into their retirement, undertaking very little planning and hoping that it’ll be alright when they get there.
Getting your holiday wrong is bad, but not the end of the world. After all, you only have to live with it for 7-14 days and you can put more effort into your next trip.
Getting your retirement wrong can be disastrous. There is no second chance and you may have to live with the consequences for 30+ years.
To help give you the peace of mind that you are on track for what will hopefully be a fun-filled, multi-decade holiday, we have put together a selection of ideas to look into in the run-up to your retirement.
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1. CREATE A VISION OF WHAT A SUCCESSFUL RETIREMENT LOOKS LIKE FOR YOU AND YOUR FAMILY
Google “money” and you’ll get over 3 billion results. Everyone’s got their opinion. Some will tell you that it’s the root of all evil, others that it makes the world go round.
It can be very emotive, but at a simple level it’s just a tool, a method of exchange.
So, what do you want to exchange yours for?
Without a clear vision of what a successful retirement looks like to you, it’s hard to see how you can plan to retire with the confidence that you will have enough money.
If you are in a couple, be honest with each other about what you both want out of your retirement and what role money is going to play in that. Take each other’s hopes and fears seriously and create a shared vision.
The beauty of retirement success is that it is completely subjective. All that’s important is what matters to you, not to your friends or colleagues or neighbours or some celebrity on the TV. Their definition of a successful retirement will be different to yours.
If you want to spend your retirement pottering around the garden and going for walks in the local countryside, you’re going to need a lot less money than someone who expects to holiday in 5-star hotels.
You might not even want to retire!
Instead, maybe it is financial independence that interests you - the emotional and psychological freedom you gain from knowing that everything you do in life, including work, is being done on your terms.
This might mean leaving your main job and moving into a part-time or freelance role. Perhaps you’ll choose a vocation that will be more enjoyable, but less well paid.
Ultimately, though, the more you can understand your own retirement ambitions, the more successful your retirement journey is likely to be.
2. CONSIDER MAXIMISING PENSION CONTRIBUTIONS BETWEEN NOW AND RETIREMENT
Pensions and ISAs are both good, but the balance probably favours pensions as your career progresses because you generally earn more and you are that bit closer to being able to draw on your pension. 
  
The main downside to pensions is that you usually can’t access your money until at least age 55 (rising to 57).
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This means that if you are in your 20s or 30s, your money may be inaccessible for multiple decades. It won’t help you with a deposit on a house or paying for emergencies, for example.
But if you are in the approach to retirement, this downside is much less relevant, allowing you to focus on the upsides of pensions.
  
When you pay money in, you receive income tax relief at your highest marginal rate.
 
This means that, once you have reclaimed the relevant tax relief, for a 20% taxpayer it costs £800 to get £1,000 in a pension, whereas for a higher rate taxpayer it only costs £600 and for an additional rate taxpayer it is just £550.
  
All income and growth within your pension build up tax-free.  The compounding of these tax-efficient returns can be a significant benefit.
 
In addition, when you come to take money out of your pension, you can have up to 25% of it tax-free (subject to Lifetime Allowance limits). The rest will be subject to Income Tax.
Once you reach retirement age, you have flexibility over the amount and timing of when you take money out, allowing you to tailor the withdrawals you make to suit your expenditure needs and your personal tax position.
 
If you think you will be a basic rate taxpayer in retirement but are a higher or additional rate taxpayer now, you can get excellent value from pension contributions.
Most people are allowed to pay in up to £60,000 (the “Annual Allowance") into their pension for the 2024/25 tax year.
This is capped at 100% of earned income.
This allowance is reduced for very high earners who are subject to the Tapered Annual Allowance.
As well as your allowance for the 2024/25 tax year, you are able to “carry forward” any unused allowances from the three previous tax years (2023/24, 2022/23 and 2021/22).
This gives you a “use it or lose it” opportunity to boost your pension funding in the run up to your retirement.
3. UNDERSTAND HOW BEST TO DRAW MONEY FROM YOUR PORTFOLIO IN RETIREMENT
If you have a combination of different tax-wrappers (e.g. pension, ISA, bank savings, taxable investments), the order in which you draw on these will help determine how long your money lasts.
It makes sense to take some time to understand the tax position of each wrapper so that you can optimise your withdrawals.
If your estate currently exceeds the Inheritance Tax (IHT) threshold, there could be some sense in delaying withdrawals from your pension funds (which generally fall outside of the IHT net)* and spending cash savings, taxable investments and ISAs first, leaving withdrawals from your pension until a bit later into your retirement.
Remember that pension income is taxable, whereas withdrawals from ISAs are tax-free.
Many pension funds give you flexibility over your withdrawal levels each year.
Your fund will last longer if you can keep your withdrawals to within your basic rate tax band or, in some cases, your tax-free Personal Allowance.
You could then draw on other savings and investments to supplement your pension income.
The right strategy will depend on your personal financial circumstances and how your asset base is split between different wrappers. But you might be surprised at how little tax most people need to pay in retirement. An understanding of how your tax position is likely to work will help you work out how much money you are going to need.
In addition, it is worth remembering that financially trusting couples may well benefit from thinking as a team rather than as two individuals.
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* In the October 2024 Budget it was announced that pensions will become subject to IHT from April 2027. It will therefore be important to monitor this situation closely and factor the latest developments into your retirement planning.
4. TAKE TIME TO UNDERSTAND YOUR ANNUITY VERSUS DRAWDOWN OPTIONS
When it comes to drawing money from your pension funds, you have two main choices, namely buying an annuity or using flexi-access drawdown (“drawdown”).
It is important to have a sense of your likely choice well in advance of your retirement, not least because it should be a key factor in determining your optimal portfolio structure in the decade or so before retirement.
The right answer for you to the drawdown versus annuity question depends on all sorts of factors, such as your wider financial position and the role of your pension fund within that, whether you have a spouse or partner who you would like to protect financially, how comfortable you are with investment risk, your health, whether or not you need and value income flexibility, the value of the pension, and whether you would like to leave some of your pension fund as a legacy.  
As a rough guide, the more cautious you are, the more that you are relying on your pension fund to cover your retirement expenditure and the smaller your fund, the more likely you are to benefit from buying an annuity. 
 
Conversely, if you are comfortable with investment risk, value the opportunity to pass your pension fund to your beneficiaries and are confident that you have enough money in and outside of your pension for your retirement, then an annuity will probably look less appealing.
 
There is a lot of peace of mind to be gained from having a guaranteed income paid into your bank account every month that covers the essentials in life. You know where you stand and this certainty can be hugely empowering. We’ve yet to come across a retired client who doesn’t thoroughly appreciate their final salary pension income, for example!
 
There is definitely some sense, particularly if you are a cautious person, of considering using some or all of your pension fund to buy an annuity to cover your essential expenditure to give you that certainty. Ultimately, it’s what a pension was originally designed to do – pay you an income in retirement. 
 
Whilst there are plenty of benefits of drawdown, there is no doubt that it can be scary. If you are drawing a bit too much from your portfolio and markets fall, particularly in the early years of drawdown, you could find yourself in financial difficulties that you might struggle to recover from. 
 
Drawdown also increases your costs of advice and investment, so that should definitely be factored in too, especially for those with smaller pension funds.
 
It doesn't have to be one or the other. Think of annuities and drawdown as two ends of a spectrum. Each has its own range of advantages and disadvantages and each household will benefit from these in different ways. Where you sit on that spectrum is as much emotional as it is financial and will change over time as your circumstances change.
Some people are close to the extremes which makes the decision more straightforward. But many of us are somewhere in the middle which means that over the course of our retirement, we may end benefiting from a mixture of drawdown and annuity to suit our changing circumstances.
5. OBTAIN A STATE PENSION FORECAST
Your State pension is likely to represent a meaningful part of your retirement picture.
If you don’t have a recent State pension forecast, it makes sense to obtain one. There are two key advantages to this. Firstly, so that you know exactly where you stand financially and secondly, if this highlights any gaps in your National Insurance records, it is generally very financially rewarding to pay additional NI contributions to fill these.
If you have a Government Gateway account, you can access your forecast online via this.
Alternatively, you can submit a hard-copy BR19 form or call the Future Pension Centre and they will post the forecast to you. Details of all options can be found via www.gov.uk/check-state-pension 
A QUICK CALL COULD SAVE YOU A LOT OF TIME
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Part of our mission is to empower as many people as possible to make better financial decisions, irrespective of whether or not they become clients of ours.
With this in mind we offer anyone a FREE 30 MINUTE CALL with a Chartered Financial Planner.
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Book your call today so our experts can talk you through how the rules apply to you and “point you in the right direction”.
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6. GET AS CLEAR AS POSSIBLE ON WHAT YOUR RETIREMENT EXPENDITURE IS LIKELY TO BE
It’s sometimes useful to think of your finances as a broken bucket.
Your income flows into the top, but there is a constant leak of expenditure out of the bottom. As long as there is always water - liquid assets - in the bucket you’ll be safe.
The bigger your expenditure ambitions are, the bigger your bucket will need to be because when you retire, the income tap is going to be suddenly turned down (you’ll still have some income – your State pension for example) and what’s in the bucket will need to last you until the day you die.
Management of expenditure is by some stretch the biggest factor in the success or failure of most household financial plans. Yet it is often the most overlooked. Maybe it’s because some of us see budgeting as a bit boring and a bit restrictive. Maybe we are scared to delve too deeply into what our bank account’s debit column might tell us. Perhaps some of us are just addicted to spending.
But, for most of us, earning money is much, much harder than spending it. It’s why people get sucked in to “get rich quick” schemes. It’s why lotteries exist and why gambling is such an enormous industry. It’s probably why you are reading an article on retirement!
You may have come across the “4% rule”. It’s a guideline that quite a few people use when budgeting for their retirement and suggests that you should aim to build up 25x your planned annual expenditure figure to be able to retire comfortably.
It may be a bit simplistic but it starkly highlights the importance of what your expenditure number actually is, both pre and post retirement.
Using this formula, if you want to be able to spend £30,000 p.a. you’ll need a £750,000 pot. Raise that to £40,000 and you need £1,000,000. For £60,000 you need £1,500,000.
Everyone would rather have £60,000 per annum than £40,000, but if you worked out that it would cost an additional half a million pounds, after tax, and think about how many years of extra work you will have to do to achieve that, is it really worth it? How much extra pleasure is that leap in income going to give you?
And so we owe it to ourselves to be very deliberate on what we plan to spend, trying to focus on things that we genuinely think we’ll need and value, that will make us happy and add to our lives, because the more we desire to spend now and in the future, the more money we are going to need to earn in order to pay for it.
7. GET A CLEAR PICTURE OF YOUR INVESTMENT AND ADVICE COSTS
Cost, the lower the better, is recognised as one of the key drivers of long-term investment returns. Fortunately, it is one of the variables of investing that you can control.
You may find that you are paying far too much. In fact, if you are not careful, fees could end up being one of your largest single expenditure items in your retirement.
Check what fund fees you are paying on your portfolio. Use the Ongoing Charges Figure (OCF) rather than the Annual Management Charge (AMC). These will be disclosed in your most recent annual statement.
Aim to pay under 0.5% p.a. to fund managers. Remember that consistent outperformance via expensive active funds is rare and accurately picking the successful ones in advance is rarer still.
If you have a financial adviser, wealth manager or investment adviser, it’s important to regularly check what you are paying them too, to make sure this still represents fair value for money to you. Is your adviser the right person to help you on your retirement journey?
Think through how much (or little) time they have spent on your finances and how much (or little) peace of mind they have given you this year. The larger your portfolio, the more you might benefit from using a fixed fee adviser.
8. THINK ABOUT WHAT EMPLOYER-SPONSORED BENEFITS YOU WILL LOSE WHEN YOU RETIRE
If you work for a large company, you may well have a range of benefits that will be lost when you retire. Common examples of this are private medical insurance and life insurance. Make sure that you are clear on what you are currently benefitting from and think about whether you and your family should replicate some of this cover on a personal basis post retirement.
Taking private medical insurance as an example, this can often feel expensive (particularly when you are paying for it yourself!) but can offer great value for money if you need it.
Policies often have a “gold, silver or bronze” approach. You could decide on an affordable cost and then structure the amount of cover you take out around this.
To reduce premiums, you could also consider a large excess and treat it as something you will only use in case of emergency.
9. GIVE SOME THOUGHT TO HOW YOU MIGHT FUND FUTURE CARE IF NEEDED
The cost of residential and nursing home care could be one of your largest expenditure items in retirement. It’s the elephant in the retirement room.
The challenge is that you don’t know if you will need it, how long you might need it for and what intensity of care would be needed. For most, a worst-case scenario would be too large a sum to feel comfortable trying to build up separate savings for, particularly as it is something that they don’t want to happen.
You might take the view that if you can get your finances into a sound enough position to retire comfortably, including owning your home outright, then if care is needed capital could be released from your property at a future point, either through a downsize, outright sale or some form of equity release.
Everything in personal finance is a trade-off. This approach may mean that children or other beneficiaries inherit less than if you had built up a separate care fees fund but you might find that more palatable than working a lot longer or spending a lot less in retirement to build an extra financial cushion.
But you might see it differently. It’s your personal choice and merits some thought.
10. PLAN FOR THE BEST BUT PREPARE FOR THE WORST
If you don’t have one already, you should make sure that you have an up-to-date Will. As well as formalising your wishes and avoiding ambiguity, it will reduce stress and speed up the administrative process for your loved ones should the worst happen.
  
On a similar note, check that you have completed an expression of wish form (sometimes called a “nomination of beneficiary” form) for your pension funds.
Pensions don’t generally form part of your estate on death and so are not covered by your Will. To avoid ambiguity and delays, tell your scheme who you want to receive your fund.
You could also use your impending retirement as an opportunity to put Lasting Powers of Attorney (LPAs) in place if you haven’t done so already.
If you lose the capacity to make financial decisions, your spouse or other loved ones won’t be allowed to deal with your money without formal authority in place.
There are two types of LPA - a Health and Welfare LPA and a Property and Financial Affairs LPA. You can have one or both.
Finally, make sure that your loved ones know where your important documents are kept!
In the event of your serious illness or death, your Will or insurance policies won’t be much use if your family don’t know where they are, or even that they exist.
Keep an up-to-date record of your finances in a secure place and tell your loved ones where to find it. Talk it through with your next-of-kin and help them understand it.
If you can’t fit this on two sides of paper, your next challenge might be to simplify your finances!
A FINAL WORD
We hope that the above has given you some useful food for thought.
Just as some people pay gym memberships or employ personal trainers, others are happy going jogging or to the local swimming pool to keep fit.
You could think of personal financial fitness in the same light.
You might be able and willing to create and maintain your own retirement plan. Or you may prefer to pay for the expertise of a financial planner to motivate you into the right action.
Whichever you choose, your journey towards a successful retirement is likely to be much easier and efficient if you take some time planning the route.
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We help lots of people think through their retirement planning. If you would like to talk through your retirement strategy, please give us a call on 020 3488 9505.
The value of your investments can go down as well as up, so you could get back less
than you invested.
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Tax and Estate planning is not regulated by the Financial Conduct Authority.
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