Golden years on the golden sands – Pension Planning for a sunny retirement

Planning for retirement is vital as it gives you the opportunity to build the lifestyle you want to enjoy in your golden years. When it comes to pension planning, you need to consider how you envision your life in retirement. For example, do you want to move home, travel the world and enjoy an active social life? No surprises here - this all costs money and so working out how you would like to spend your time in the future can help you understand how much income/capital you will require to make it happen. This is even more important if you would like to retire early. 

So now is the time to think – deciding what is possible comes later.

In your 20s, while you may not have a clear idea of what you want in later life (as this may seem a long way off), there are a lot of things you can do to help build the foundations for your retirement. For example, making sure you are enrolled in a pension as early as you can.

If you are self-employed you can set up a personal pension.

In your 30s, the priority should be maintaining or even increasing your pension contributions which can be particularly challenging if you are starting a family, buying your own home or getting married. Regularly reviewing your pension provision is also worthwhile. Are you getting decent returns on your capital and are you comfortable with the amount or risk your capital is exposed to? 

Note, with any investment, generally your attitude to risk will remain the same throughout your life, however, your capacity to absorb loss may diminish as you get older i.e. nearer retirement in this scenario.

In your 40s, you should seriously start to assess your forecast retirement income and whether it will meet your needs, as well as what you want from your retirement if you haven’t already. For example, what is your state pension forecast? How much money are you expected to have in your pension(s) by the time you want to retire? Are you seeing a shortfall in your expected income? And, always keep reviewing your plans.

In your 50s, you can currently access some personal pensions from the age of 55. Your pension provider may offer, or automatically apply a ‘lifestyling’ option which switches your pension capital into lower-risk funds as you get closer to your intended retirement age and this is aimed at protecting the capital already in the pot.

Note - if you have more than one pension, it may be beneficial to consider consolidating them.

In your 60s, you should have access to a state pension at some point, which you could top-up before drawing it. You can also defer it.

Of course, you can work as long as you like (or need to). However, it’s a good idea to know when you can access your personal and state pensions as this can impact your plans. 

Drawing your pension

Another thought to consider in advance is when and how you can draw your pension(s). If you have a defined contribution pension, you can usually access it from the age of 55, although this is set to rise to 57 from 2028. You also might receive a lump-sum. There are other ways to generate income without accessing your pension such as part-time work, accessing savings or via property rental income. Once you decide when you will draw an income, it is vital you know how. 

There are several different ways to draw money from your pension, including -

Annuity
This is an insurance product that will pay you a guaranteed regular income for the rest of your life. There are various annuity ‘shapes’ offering different benefits and guarantees. 

Drawdown
By using drawdown, you can access your pension pot directly by making flexible withdrawals and keeping the rest invested. Again, you can take up to 25% of your pot tax-free, while 75% is taxable.

Withdrawing a lump sum – encashing your entire pension(s)
If you withdraw a lump-sum, 25% of the money in your pension can be taken tax-free, but 75% is taxable at your marginal rate of income. 

Multiple lump-sum withdrawals (Phased Drawdown)
This is when you withdraw a series of lump-sums. 25% of each withdrawal is tax-free (the remaining 75% is taxable).
It is possible to combine different methods to achieve the balance that suits you and you don’t have to take all of your tax-free cash in one go. However, many pension transactions are irreversible so seeking advice is recommended.

To retirement and beyond

Hopefully, your retirement will mark the beginning of many new experiences and adventures. But remember it is not a single event but a whole period of your life made up of different stages. You should therefore continue looking ahead and updating your plans as your life evolves. A comfortable retirement requires discipline, much saving and planning to make sure that you are able to do everything you want to when you finish working. 

Engaging with a financial adviser to ascertain your clear retirement ambitions including how much capital you can afford to invest, how much income you will need to draw and how much flexibility there is within your assets. These can prove to be crucial components in making your retirement dreams a reality. 

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.