Helping you retire with confidence

For many people, retirement is something they have been looking forward to for years. The prospect of having more freedom, spending time with family, travelling or simply enjoying a more relaxed pace of life can be very appealing. But retirement also brings an important financial question:

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How do I turn my pensions and savings into an income that will last for the rest of my life?

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This is where retirement income planning can make a real difference. For most people, retirement is no longer simply a case of taking a pension and receiving a fixed income. Modern pension rules provide considerable flexibility, with options including pension drawdown, lump-sum withdrawals and annuities.

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That flexibility can be valuable, but it also means there are more decisions to make.

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How much will you need in retirement?

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One of the most important parts of retirement planning is understanding what your retirement lifestyle is likely to cost.

Your spending may look very different once you stop working. You might spend less on commuting, work clothes and other employment-related costs, but more on holidays, hobbies, meals out or helping family members.

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It can therefore be helpful to divide your expected expenditure into three broad areas:

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Essential spending – your mortgage or rent, household bills, food, insurance and other regular commitments.

Lifestyle spending – holidays, days out, hobbies, entertainment and other things you want to enjoy during retirement.

Future or unexpected spending – home improvements, replacing a car, helping children or grandchildren, or meeting potential care costs later in life.

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Having a realistic picture of your expenditure gives you a much better starting point for deciding how much retirement income you actually need.

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Your retirement income may come from more than your pension

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For many people in Northern Ireland, retirement income will be made up of several different sources.

These could include:

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• The State Pension

• Workplace pensions

• Personal pensions

• ISAs and other investments

• Cash savings

• Rental property

• Other assets or sources of income

 

The important point is that these different assets do not necessarily need to be used at the same time. A carefully constructed retirement income plan can help determine which assets to use, when to use them and how much income to take from each source. This can be particularly important from a tax-planning perspective.

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Pension drawdown gives you flexibility — but it needs careful management

 

Pension drawdown has become an increasingly popular way of taking an income in retirement. Rather than using your entire pension to purchase an annuity, you can generally leave the remaining funds invested and withdraw money as required.

This can provide considerable flexibility.

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You might take a higher income in the early years of retirement when you are travelling and enjoying an active lifestyle, for example, and reduce your withdrawals later. However, there is an important consideration: your pension remains invested while you are taking an income from it. Investment values can fall as well as rise. If markets perform poorly while you are also withdrawing money, the impact on the long-term sustainability of your pension can be significant.

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This is sometimes referred to as sequence of returns risk. For that reason, deciding how much income to take is just as important as deciding where your pension is invested.

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Don't overlook the impact of inflation

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Retirement could last for several decades. Even relatively modest inflation can significantly reduce the spending power of your income over a long period. For example, an income of £30,000 a year today will not have the same purchasing power in 20 years if prices continue to rise.

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Your retirement plan should therefore consider whether your income needs to increase over time and how your investments can potentially help provide that increasing income. This is one reason why simply choosing the highest initial income available is not necessarily the best retirement strategy.

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Tax planning can make a significant difference

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Tax planning is another important part of retirement income planning. Depending on your circumstances, you may have a choice between taking income from pensions, drawing on savings and investments, or using other sources of income. 

 

The order in which you access these assets can sometimes make a meaningful difference to the amount of tax you pay over your lifetime. For example, taking more pension income than you need in a particular tax year could result in paying tax at a higher rate than necessary.

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Equally, retaining all of your pension until later in retirement may not always be the most appropriate strategy.

The most tax-efficient approach will depend on your individual circumstances, including your other income, pension arrangements and future plans. Tax rules and allowances can also change, so retirement income planning should be reviewed regularly.

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What about your spouse or partner?

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Retirement planning should not necessarily be considered on an individual basis. If you are married or have a partner, it is important to look at your finances as a household. 

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You may have different pension arrangements, different retirement dates and different levels of State Pension entitlement.

There may also be important considerations around what happens to your pension and other assets if one of you dies.

Planning together can help ensure that your retirement income strategy continues to work if your circumstances change.

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Planning for later life

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When thinking about retirement, it is natural to concentrate on the first few years. You may be thinking about travelling, spending more time with family or finally getting around to all those things you never had time for while working. However, a good retirement plan should also consider what your financial position could look like later in life.

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Your spending may change significantly as you get older. You may travel less, but you could potentially face higher costs associated with health, support or care. It is impossible to predict exactly what will happen, but incorporating different scenarios into your retirement plan can help you understand how resilient your finances are.

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Leaving something behind

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For many families, retirement planning is also part of wider estate planning. You may want to leave money to your children or grandchildren, help family members financially during your lifetime, or ensure your spouse or partner is financially secure if you die first.

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Pensions can play an important role in estate planning, so it is worth considering your pension arrangements alongside your Will and other assets. Your retirement income strategy therefore needs to balance three potentially competing objectives:

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Enjoying your money during your lifetime.

Making sure your money lasts for as long as you need it.

Leaving an inheritance for the people who are important to you.

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There is no single 'right' retirement strategy

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Perhaps the biggest misconception about retirement planning is that there is one universally correct way to take your pension.

There isn't. 

 

Someone with a guaranteed final salary pension, substantial savings and a fully paid-off home may have very different requirements from someone whose retirement income depends almost entirely on a personal pension.

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Similarly, a person who wants to spend heavily in the first ten years of retirement may need a very different strategy from someone who prefers a consistent income and wants to leave as much as possible to their family. The right approach should be based on your circumstances, your objectives and your attitude towards risk.

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Why professional retirement income planning can help

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Retirement income planning brings together all of the different elements of your financial position.

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A comprehensive retirement plan can help answer questions such as:

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• How much income can I afford to take from my pensions?

• Will my money last throughout retirement?

• When should I take my State Pension?

• Should I use my pension, savings or investments first?

• How much should I keep in cash?

• How should my pension remain invested?

• How can I manage my tax position?

• What happens to my income if investment markets fall?

• How much could I afford to give to my children or grandchildren?

• What happens to my finances if my spouse or partner dies first?

• Am I on track to achieve the retirement I want?

 

Rather than simply looking at the value of your pension today, retirement income planning considers how your finances could develop over the years ahead.

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Planning for retirement should start before you retire

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Ideally, retirement income planning should begin several years before you finish work. This gives you time to identify any potential shortfall, consider your options and make changes where necessary.

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But if you have already retired, it is not too late. Your circumstances, expenditure and investment markets will change throughout retirement, so your retirement plan should evolve with you. The aim isn't simply to have a large pension fund. It's to make sure your money can provide the retirement you want, for as long as you need it.

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If you are approaching retirement in Northern Ireland and would like to understand how your pensions and other assets could provide a sustainable income, professional financial advice can help you develop a retirement income strategy tailored to your circumstances.