Approaching Retirement

Whether you are ten years away from retirement, five years away or looking to retire this year, the need for advice is as important as ever. Put simply we can help you to understand what you have, what you want and what you need to do to get there.

It is mandatory for pension providers to offer ‘Investment Pathways’ as an option for all clients who are looking to access drawdown on a non-advised basis.

As a reminder, there are four possible outcomes:

• Option one: I have no plans to touch my money in the next five years.

• Option two: I plan to set up a guaranteed income (annuity) within the next five years.

•Option three: I plan to start taking a long-term income within the next five years.

•Option four: I plan to take my money within the next five years.

Investment pathways may encourage non-advised clients into an investment which is broadly designed to meet their needs, however, it’s no substitute for advice. There are many aspects clients need to think as they approach retirement, of which the ultimate destination of their retirement fund is only one.

Whatever the client’s individual circumstances or expected level of income, as they’re approaching and planning for retirement your advice can have a real positive impact, especially during these unprecedented times.

Who we can help?

No matter which stage in the retirement journey you are at, their overall retirement funds will benefit from advice. They’re likely to be lots of questions that need answers and often these answers can’t be found by going directly to the provider. For those with a few years to go, there’s still time to plan for retirement and maximise future income by making the most of opportunities available to them now. For those whose retirement is imminent, maximising tax allowances, understanding state benefits and ensuring they draw down from the correct wrappers is key.

We’ve split this into two categories depending on your life stage and specific questions they may be asking:

Planning for retirement - How do I know how much income I’m likely to need?

These clients are a few years off retirement but want to use the next few years to plan and maximise their retirement benefits. This category also includes those who are approaching retirement and asking themselves when can I afford to retire? These clients are closer to retirement but still have time to take action to maximise their benefits.

At retirement – Which assets should I use and how will they be taxed?

These clients are looking to retire now and start drawing down from their funds. They may want to maximise future income potential or may be thinking about future long-term care needs or legacy and death benefits. 

How much will I need? When can I afford to retire?

Any review of retirement savings should start with a conversation about what your clients are really hoping for in their retirement. Your adviser can help you understand your current pensions and investments and how they can be used in the most efficient way to generate an income for you. This will help you understanding when you can afford to retire. You can also use the ‘online BR19 Form’ to get a state pension forecast.

How much you need is going to be a combination of your personal circumstances and aspirations. You’ll then need to agree on what is achievable given your existing assets and ability to save more.

Many people over or underestimate the amount of income they’ll need, but an amount of half to two thirds of their final salary is generally agreed. Clients who are five to ten years away from retirement should have a good idea of what their circumstances are likely to be, such as whether they will have paid off their mortgage, are still supporting children and what they think their retirement will look like. Will it be regular luxury holidays, frequent meals out and expensive hobbies, or are they content with the ‘Lockdown’ style of retirement consisting mainly of country walks and Netflix?

For clients who are asking how much they need in retirement, any planning has to start with these sort of questions. Determine what your fixed expenditure will look like and then have an honest and frank conversation about what your leisure time will look like and whether they realistically will be able to afford it. You may have other aspirations such as gifting lump sums to their children, supporting a charity or continuing some form of paid work – all of this can be built into your planning.

Which assets should I use and how will they be taxed?

The order in which savings are taken is key to reducing the amount of tax you pay in retirement. In fact, prioritising which savings are used up first can be almost as important as saving itself, helping you understand which pot of money should be accessed first can have a demonstrable impact on your overall wealth and income levels.

Pensions are one of the most tax efficient investments and may not necessarily be the first asset to draw income from.

By coming to us rather than directly to their provider, we can demonstrate the benefits of decumulating their taxable assets first, tax-deferred assets second and tax-free accounts last.

Even if your only asset is your pension, you’re still able to add value with advice, for example phased retirement may be something to consider.

How should I invest?

Financial planning starts with ‘what’s my objective?’ Your adviser will help you be clear about what you want from your money and when. Then they’ll discuss how much investment risk you are comfortable to take, and what that might mean in different market conditions. For most people the right answer is a professionally managed diversified portfolio using many different holdings. Your adviser has access to a curated range of these to suit all different types of people.

Pensions are by far still the most tax efficient way of saving for retirement. Even if you can’t commit to regularly saving more, they could consider additional lump sums.

Tax relief on personal contributions is limited to the higher of £3,600 per tax year or 100% of earnings. The Annual Allowance, for contributions from ALL sources for 2024/25 is £60,000, unless the Money Purchase Annual Allowance (for those who have accessed their benefits flexibly) or Tapered Annual Allowance (for high earners) applies. In addition, subject to certain conditions, an employee may be able to carry forward any unused Annual Allowance from the previous three tax years, provided that he or she was at some point during the tax year(s) in question, a member of a registered pension scheme. Individuals are subject to income tax under self-assessment at their marginal rate on any contributions more than the Annual Allowance.

Making the most of other tax allowances

You should be making the most of your available tax allowances by ensuring any investments are in the right name and wrapper. If you are maximising pension contributions, you should ensure you’re also using any unused allowance from a spouse. A non-working spouse can still contribute £3,600 per tax year and ensuring both spouses are making pension contributions means you’ll potentially be making the most of their tax-free allowances during retirement. You should also use your full ISA allowance each tax year if possible as this will give them the option of taking tax free income in retirement.

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