Planning for retirement

Start from your actual spending rather than a percentage of salary. Some costs fall in retirement — commuting, and often the mortgage — while others rise, particularly travel in the early years and care later on.

The PLSA’s Retirement Living Standards, produced with Loughborough University, give benchmark budgets at minimum, moderate and comfortable levels for singles and couples, excluding housing costs. They are updated annually, so use the current figures rather than one you saw a few years ago.

• Split your spending into essentials and discretionary — the essentials are what you want covered by guaranteed income.
• Add the one-off costs: a car replacement every few years, a roof, help for children.
• Assume a long retirement. Planning to 90 or beyond is prudent rather than pessimistic.
• Include your State Pension, and check your forecast on GOV.UK rather than assuming the full amount.

Find out whether you are on track

Our free retirement calculator turns the income you want into the pot you need, and shows the gap against what you are currently on course for.

A rough rule of thumb is that you need a pot of around 20 times the annual income you want it to provide, after allowing for the State Pension and any defined benefit entitlement. If you want £30,000 a year and expect £12,000 from guaranteed sources, the remaining £18,000 implies a pot of roughly £360,000.

If there is a gap, the levers available are all more effective the earlier you pull them:

• Increase contributions, capturing higher-rate relief and any employer match in full.
• Use carry-forward to mop up unused annual allowance from the previous three tax years.
• Work slightly longer, which adds contributions and shortens the period the pot must fund — a disproportionately powerful combination.
• Review charges and investment mix, where a percentage point of cost compounds into a large sum over decades.
• Reconsider the target, deliberately rather than by default.

Tax-free cash

You can normally take 25% of your pension tax-free from the minimum pension age — currently 55, rising to 57 from 6 April 2028 — subject to the lump sum allowance. Taking it all immediately because you can is rarely the optimal choice; phasing it can reduce tax over the whole of retirement.

Drawdown

Your pension stays invested and you take a flexible income. It offers control and leaves a fund to pass on, but the value can fall and there is no guarantee it lasts as long as you do.

Annuity

You exchange some or all of the pot for a guaranteed income for life. Rates improved substantially as interest rates rose, and an enhanced annuity can pay considerably more if you have health conditions.

A combination

Many retirees use an annuity or defined benefit pension to cover essential spending, and drawdown for the discretionary part. That way a market fall affects holidays rather than heating.

Sequencing risk. A market fall in the first few years of drawdown does far more damage than the same fall later, because you are selling units to fund income while prices are low. Holding one to two years of spending in cash mitigates this.

Inflation. Over a thirty-year retirement, even modest inflation halves purchasing power. A plan built on today’s numbers with no escalation quietly fails in the second half.

Longevity. Average life expectancy is the middle of a distribution, not a deadline. Roughly half of people live longer than the average, and running out at 92 is not a recoverable position.

Tax bands. Drawing income unevenly can push you into higher-rate tax in one year while wasting your personal allowance in another. Smoothing withdrawals across years is one of the most reliable savings available.

The 2027 inheritance tax change. From April 2027 most unused pension funds are expected to fall within the estate for inheritance tax, which reverses the previous logic of spending other assets first and leaving the pension untouched.

This is the stage of life where advice most reliably pays for itself, because the decisions are large, interacting and hard to undo. An adviser can:

• Build a cashflow model showing what your income looks like year by year, under good and bad market conditions.
• Set a sustainable withdrawal rate and review it annually rather than fixing it once.
• Sequence withdrawals across pensions, ISAs and general investments to minimise lifetime tax.
• Advise on the drawdown-versus-annuity balance, including whether an enhanced annuity applies to you.
• Coordinate the plan with your estate, particularly given the 2027 pension change.