More people are hitting retirement than ever before. If you’re close to retiring after many years of working, saving, and investing, now is an ideal time to turn your thoughts to how best to use your accumulated assets to ensure a sustainable, worry-free income.
Understand how much you’ll need to live on
To make sure your savings will last a lifetime, you’ll first need to work out how much money you need to live on.
The amount of income you need will likely fluctuate throughout your retirement. For example, in the early years of retirement, you’ll probably find you spend more.
Hopefully, you’ll retire in good health and be relatively physically fit. As such, the first five to 10 years of retirement may see you travelling more, doing home renovations, or simply enjoying your freedom with friends and family through a series of special outings, meals, and events you’ve previously struggled to make time for.
Following this active period, there’ll come a time when you begin to slow down. While you may remain busy with hobbies and regular social activities, the idea of long-haul travel or extended periods away from home may be less appealing.
As you enter the latter stages of life, your mobility may become more limited, and you might need to pay for care, which could prove costly.
From bucket lists to spending buckets
Once you’ve reviewed your bucket list and have a clear vision of how you’d like to spend your retirement, you may find it useful to portion your savings and investments into separate buckets.
In basic terms, this involves separating your portfolio into investments dedicated to specific purposes. This may include buckets for:
- The here-and-now, dedicated to covering your living expenses and emergency funds for as little as a year
- Your five-year travel plans
- Potential care costs, which will hopefully remain untouched for 10 years or more.
While capital you’re saving for the long term could be invested to maximise potential growth opportunities, money you need in the next three years should be assigned to appropriate interest-bearing products, with a focus on guaranteed income returns or high-interest payments.
As well as helping you to establish suitable buckets, a financial planner will also assist you in assessing your cash flow needs. They will also be on hand to navigate stock market movements and ensure you factor tax into your withdrawal schedule.
Structure a sustainable and tax-efficient stream
Throughout your career, you’ll likely have focused on tax-efficient saving and investing to grow your wealth and maximise returns in preparation for the retirement you desire.
Once you retire, withdrawing and spending your capital tax-efficiently can help preserve your wealth and increase the amount you may be able to leave to loved ones in your legacy.
Planning your income before you retire could allow more opportunity to take full advantage of tax allowances and exemptions.
Meanwhile, if you’re married or in a civil partnership, planning together could help you maximise tax efficiency.
When looking at your combined wealth, consider the order in which you should begin decumulating. Ideally, you should use cash first, followed by taxable investments, ISAs, and finally pensions.
There’s no single answer to what this may look like – much will depend on the investments you hold, additional income sources, and your tax bracket.
Spend excess cash first
We always recommend that clients keep an emergency fund in an easy access savings account. Ideally, you should have enough cash to cover around three to six months’ expenditure – that said, depending on your circumstances, you may need to hold 12 months or more.
If you hold more cash than you truly need, it may be wisest to spend this first, before you begin to withdraw funds from your pensions or investments.
When markets are volatile, selling investments at the wrong time could leave you with less to spend than you had hoped. Using excess cash allows you to leave funds invested, which may provide enough time for them to recover any lost value.
Remember to factor in your State Pension and other relevant social security payments
The UK State Pension Age is currently 66 and will gradually rise to 67 between 2026 and 2028.
If you’re eligible, you have to apply before payments will commence. The benefit of this is that you can control the timing.
Depending on your circumstances, you may benefit from delaying your application. Doing so could increase the amount you receive.
Your State Pension amount will increase by 1% for every nine months you defer.
If you opt to defer, you can choose how you receive the amount owed. You can take it as:
- A one-off payment of up to 52 weeks (12 months)
- Increased regular payments
- A combination of one-off arrears payment and increased regular payments.
It’s worth noting that you can only claim one calendar year of payments as a one-off payment, and there’ll be no interest added.
Read more: Did you know you could defer receiving your UK State Pension?
To find out more about how the UK State Pension may boost your retirement income, please get in touch. We can help you understand how much it’s worth to you and advise you on all your options.
Consider your future legacy
While UK pension savings currently fall outside the scope of Inheritance Tax, from April 2027 this will no longer be the case.
If you’re a British expat with pensions in the UK and are expecting to spend your retirement abroad, you may wish to transfer your retirement savings to your country of residence.
The options you have will depend on where you live and the type of pension you have – which is just one reason to seek independent financial advice before making a final decision.
Your pension may be the most valuable asset you own, so make sure you protect it by doing as much research into the advantages and disadvantages of a pension transfer as possible before signing on the dotted line.
We’re here to help and will be delighted to chat about your situation and answer any questions you may have.
If you’re better off leaving your pension in the UK, it won’t cost you anything to establish that this is your best option.
Get in touch
If you’d like help to create a financial plan to structure a sustainable and tax-efficient income in retirement, please get in touch.
Email enquiries@alexanderpeter.com or give us a call on +44 1689 493455.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate estate planning or tax planning.
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