It's tempting to look at your personal and/or workplace pensions first and treat them as the main, or only, source of retirement income. But in reality, you may have several potential sources:
- State pension
- Workplace and personal pensions
- ISAs and other investments
- Cash savings
- Rental or business income
- Future inheritances or other one-off receipts
Seeing all of these as one, rather than as separate pots, is central to effective retirement planning.
Can you maintain your lifestyle in retirement?
Your lifestyle goals are personal. You may want to travel regularly, own a second home in the country, have the ability to help children or grandchildren, or simply the freedom to spend more time on what you enjoy. A core question is whether your assets can support that lifestyle, not just for the first few years of retirement but potentially for several decades. One way to check this is by using cashflow modelling, where you look ahead to see how your income needs might change over time.
Cashflow modelling can help by:
- Estimating future income and spending under different scenarios
- Showing the impact of inflation over time
- Exploring the effect of changes in markets, tax, or interest rates
- Highlighting when assets might be drawn down and when they might grow
This isn’t a prediction, but it can be a powerful way to understand what’s realistic and where you may need to adjust your plans.
How long does your money need to last?
Many people now spend 30 years or more in retirement. Official life expectancy figures are updated regularly by the Office for National Statistics and can provide a useful starting point in your planning. But longevity has been increasing, and for those in good health with a family history of long lives, planning for a longer retirement can be wise.
Financial planners often use rules of thumb such as multiplying your desired annual income by the number of years you might spend in retirement to estimate the size of pension pot you might need. Or drawing only a modest percentage of your portfolio each year to preserve your capital. These are starting points, not hard rules, and need to be tailored to your circumstances, your overall investment strategy, and your tolerance for taking risk with your investments.
What are your options for taking pension income?
When you’re ready to access your pension savings, your main options will typically include:
- Annuity purchase
You can use your pension savings to buy an annuity, usually from an insurance company. An annuity can provide a guaranteed income for life or for a fixed term. It can offer peace of mind, but usually with limited flexibility once it’s set up. The level of income you receive depends on gilt yields at the time of purchase, your age, health, and the type of annuity you choose.
- Income drawdown
With drawdown, your pension savings remain invested, and you choose how much income to take and when. This can offer greater flexibility and the potential for continued growth, but your income isn’t guaranteed, and the value of your fund can fall as well as rise.
- Lump sum withdrawals
You may be able to take lump sums directly from your pension, and in many cases this can be tax free up to certain limits. Any amount above the tax-free lump-sum allowance will count as taxable income for that year.
The rules around tax-free lump sums, and how much can be taken without additional charges, changed from April 2024 with the abolition of the lifetime allowance for pension contributions and the introduction of new lump sum allowances. The lump sum allowance is normally 25% of your pension pot, up to a maximum of £268,275. It’s important that any retirement income strategy reflects the current rules in force when you draw the income.
In practice, many people use a blend of these options over time. For example, you might secure a base level of essential income through an annuity, a defined-benefit pension (state and/or workplace pensions), or a combination of these. Meanwhile, you can keep other funds invested to provide flexibility and growth potential.
Our financial advisers can work with you to design a strategy that coordinates pension choices with your wider investment portfolio and tax position.
Should you defer your state pension?
Under the current rules, you can claim your state pension at age 66 for both men and women, rising gradually to 67 between April 2026 and April 2028.
Deferring your state pension can increase the amount you receive later on. The uplift you get for deferring is set by government and has changed over time. You should check current and future deferral terms, and the implications for your tax position, before making a decision. The latest figures and rules are published on the government’s website.
When can you take your pension?
The minimum age at which most people can access private pension savings is currently 55, but this is scheduled to rise to 57 in 2028 (and may rise further in the future). There’s no upper age limit for holding pension savings, but product-specific rules on how long you can remain in certain arrangements may still apply. For example, there may be restrictions on how long benefits can remain unused or within a particular arrangement. You should review this regularly.
The state pension age is also rising and is kept under review by the government. This makes it sensible to check the current pension age for your date of birth on the official government website when planning your retirement timeline.
Need help with your income options in retirement?
Taking an income in retirement can feel complex, and it’s worth speaking to an adviser to make sure you’re getting the best pension planning advice for your situation.
Reach out to your usual Rathbones contact or fill out our enquiry form below to get in touch. We’re here to support you every step of the way.
