Retirement is changing
With longer lifespans and different ways of accessing pension money, there’s no longer a one-size-fits-all approach to retirement.
Some will wish to spend more time with family and friends, or travel abroad. But for others, finding part-time work or increasing caring responsibilities will be the focus.
With most modern pensions, the decision of how and when we spend them rests firmly on us. It can be overwhelming to balance factors like inflation, investment performance and our physical health. If we get it wrong, we risk running out of money in retirement.
But by understanding our options and working out a plan, we can regain control and look forward to a happy retirement.
Making a plan
1. What does a happy retirement mean to you?
We all have different ideas of what a happy retirement looks like. To help understand how long your money will need to last, you’ll need to consider:
- when you’d like to retire;
- if you’d like to carry on working, perhaps part-time;
- what kind of lifestyle you’d like to lead;
- whether you have any dependents; and
- the status of your health.
The answers to some of these will naturally depend on our financial situation. You might be concerned that you’ll have a gap between your desired lifestyle and available income.
But that’s OK. It’s much better to have this knowledge and use it to inform your next steps.
2. Take stock of your finances
In order to plan for the future, you need to understand your different sources of retirement income.
- Track down your old personal and workplace pensions
The average worker today may have up to eleven jobs by the time they retire. With Auto-Enrolment introduced in 2012, this means you could have a number of different pension pots to track down. If you’re not sure how many pensions you have, you can use the government’s free Pension Tracing Service to find any lost pensions.
If you’ve got several pensions with different providers, each with different fees, it can be hard to keep track of them all. Combining your pensions might simplify matters. You’ll only need to keep track of a single pot and pay fees to one provider. This could reduce the amount you’re paying in fees overall. You can start combining your old pensions today by transferring them to PensionBee.
- State Pension
Check your State Pension forecast on the government website. The current State Pension age is 66 (rising to 67 in 2028).
- Other savings
Finally, don’t forget to include any other savings and investments, such as ISAs, as well as any potential income from property.
The total sum from these savings and investments will inform many of your retirement decisions. This looks different for everyone and some may wish to work longer and transition to part-time employment. On the other hand, health concerns may necessitate an earlier retirement date for others.
Needless to say, the earlier you wish to retire, the longer your savings may need to last.
3. Work out how long your savings need to last
After decades of working and saving into your pension, you’ll be looking forward to the day when it’s finally time to retire and you can start spending your pension cash. You might not be sure of the right way to withdraw your money, and how long you may need it to last, so you don’t run out of money in retirement.
While none of us can predict the future, fortunately there are some great tools available to help determine how long your retirement income might need to last you.
The Office for National Statistics (ONS) has a life expectancy calculator. Simply add your age and sex and it’ll let you know your average life expectancy and your chances of reaching older ages.
4. Calculate your potential income
Once you have a rough idea of how long you want or may need your money to last you, you can use PensionBee’s Pension Calculator to forecast your retirement income. Simply add your current pension pot(s), and then toggle between different retirement ages and income levels.
If you’re ready to start planning your withdrawals, then the PensionBee Drawdown Calculator is a helpful tool. Just add your total pension pot, and it can help you understand the tax you could pay on your pension withdrawals.
5. Context is king
So how much does retirement actually cost?
Research from the Pensions and Lifetime Savings Association (PLSA) helps people visualise retirement at three different living standards; ‘minimum’, ‘moderate’ and ‘comfortable’, at three different income levels to provide perspective.
For couples living on the ‘minimum’ level of income, they can afford £15 per week for public transport, as well as a week-long UK holiday every year. This compares to those on a ‘moderate’ income, who can likely afford a small car and a two-week holiday abroad once a year. Those on a ‘comfortable’ income can afford to replace their car more often, as well as enjoying a longer holiday abroad and more weekend breaks in the UK.
What else should I consider?
Inflation
As recent events have shown, high inflation can lead to higher living costs. You can use the PensionBee Inflation Calculator to visualise how inflation might affect the value of your pension pot over time.
Financial market movements
Most modern personal and workplace pensions are diversified, meaning they’re invested in a range of different assets. This means that the amount you have in your pension plan depends on how your investments have performed over time. Remember, the value of your investments can go down as well as up.
Spending patterns
How you spend your income will change over the course of retirement. Whilst it’s not an exact science, spending tends to follow a ‘U’ shaped pattern for most people. This means you’re likely to spend more when fit and healthy, followed by a natural decline as life gets a little slower. Lastly, there’s an uptick where nursing or care costs come into play.
Income tax
Withdrawing money from a pension isn’t the same as taking cash from a savings account. Only 25% of a pension can be withdrawn tax-free – and the rest gets taxed as income.
Using other income sources first could save you money. Withdrawals from ISAs, for example, are completely tax-free.
Accessing your pension
From the age of 55 (rising to 57 in 2028) there are six options for taking money out of a defined contributions pension.
- Delay taking your pension and leave everything invested.
- Withdraw everything. 25% will be tax-free and the rest taxed as income.
- Use your pension to buy an annuity. This either pays a guaranteed income for life or for a fixed term, with the option of taking 25% of your pension pot tax-free.
- Take a flexible income and leave the rest invested. This again has the option of taking 25% tax-free. It also has the benefit of leaving part of your pension invested, with the potential for continued investment growth.
- Take your pension as a number of lump sums, where 25% of each amount is tax-free and the rest is taxable. These are known as Uncrystallised Funds Pension Lump Sums (UFPLS). They can be a good way to reduce tax on your income.
- A mix of any of the above. You might take a 25% tax-free lump sum, perhaps for a home renovation for example. Then you could use another part of your pot to buy an annuity to cover essential bills, then move the rest into drawdown to use when needed.
Finding help
For a better understanding of the terminology and all things pensions, PensionBee’s Pensions Explained content hub is a great place to start. There you can find out about pension withdrawals, retirement planning and more – all explained in simple, human language.
If you’re over the age of 50 and have a defined contribution pension, you’re eligible for a free appointment with Pension Wise. PensionWise is a service from MoneyHelper, backed by the government to help people understand their pension options. It’s free and impartial, and it doesn’t try to sell you anything. That also means it can only offer ‘guidance’ in general terms. It can’t offer financial advice about the specific companies and funds to use, or how much to withdraw and when. Find out more about what happens in a Pension Wise appointment or book yours via the MoneyHelper website.
Individual pension providers will also have toolkits and general information on how you can access your pension. Like Pension Wise, they can’t provide specific advice.
To get specific financial advice, you’ll need to pay for an independent financial adviser. You can search for local, qualified advisers on sites such as unbiased.co.uk.
Risk warning As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
About PensionBee
PensionBee can help you combine your old pension pots into one online plan that lets you keep track of your balance, make flexible contributions, invest in line with your values and make withdrawals from the age of 55 (rising to 57 from 2028). For more information, visit PensionBee.
Learn how long your pension could last with the PensionBee Pension Calculator.
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