Funding the lifestyle you want

One of the most common concerns among those approaching retirement is whether they will have enough money to last them. A new study¹ shows that only 25% of retirees feel very confident they have saved enough for retirement. 

As food prices continue to soar and petrol costs reach an all-time high in the UK, the rising cost of living is without doubt having an impact on many people's financial plans, both short and long term. 

If you are approaching retirement or have already started taking money from your pension or other retirement savings, you would not be alone in feeling a little anxious about the effect the cost-of-living crisis might have on your lifestyle in retirement. 

While it is impossible to predict the future with complete certainty, there are a few things you can do to feel more confident about spending your money in retirement. 

Add up all your sources of income 

Your main source of retirement income may well be your pension plan. But when it comes to planning your finances in retirement, it is important to think beyond this. Consider other potential sources such as Individual Savings Accounts (ISAs) and other investments, as well as any rental income you receive from rental properties you let. 

And do not forget the State Pension, which is currently £185.15 a week (£9,628 a year) for a single person with full entitlement. Although the State Pension’s annual increase is currently below inflation, every little helps, and the total of all your savings and income might add up to more than you think. 

Watch out for unnecessary tax bills 

Paying too much tax in retirement is a common pitfall for some retirees, and one that could be potentially avoided with having the right plans in place. 

If you are already drawing or plan to draw income from multiple sources, you need to consider how that will be taxed. When and how you take your money can make a significant difference to how much tax you pay and how long it will last. Taking money little and often could make all the difference when it comes to reducing your tax bill. 

When it comes to your pension savings, you can typically take 25% tax-free from age 55 (age 57 in 2028), either in one go or spread out over a longer period. After this, any money you take from your pension savings, as well as your State Pension, is taxable just like any other income. That means you will need to pay income tax on anything over your tax-free cash limit and any annual personal Income Tax allowance you get. 

It is likely that the more money you take, the more tax you will have to pay, although how much will depend on which tax band your income falls into. So, if you take all your pension savings at once, or in big lump sums, you could be paying more tax than you need to. But by taking your 

pension savings over several years and taking just enough to stay in the lowest tax band you can, you could keep more of your money overall. 

Make the most of your Individual Savings Account (ISA) 

Another way to avoid an unnecessary tax bill is to make the most of your ISA savings. You do not pay tax on any investment growth or interest you earn, or on the proceeds you take from an ISA. So, it is a very tax-efficient way to save. 

You could consider using any ISA savings you have first and delay accessing your pension savings, giving them more time to stay invested and potentially grow in value. Remember though, the value of all investments can go down as well as up, and you may get back less than you paid in. 

Or, if you have already started taking an income from your pension, you could use your ISA savings to supplement that income. This could allow you to take smaller payments from your pension and avoid overpaying Income Tax on them. 

Getting to grips with tax implications can be a bit overwhelming as there is a lot to consider. Tax rules and legislation can change, and personal circumstances and where you live in the UK also have an impact on your tax treatment. On top of that, tax varies for other sources of income like property, state benefits, or even your salary if you are planning to work in some capacity for a little longer. 

Keep track of your investments 

Where your money is invested could have the biggest impact on how long it will last in retirement. It is important to regularly review your investments to make sure they remain on track and remain aligned with your plans and attitude to investment risk. 

For example, your pension savings may be invested in fairly high-risk funds that have the potential to grow significantly in value, but also are more likely to be impacted, particularly during periods of market volatility. Moving to lower-risk investments means that you are less likely to see big ups and downs in the value of your pension savings. 

However, if you are relying on your pension savings to provide you with a comfortable income for the rest of your life, you also need to make sure that your investments will provide enough growth potential. This is particularly important in the current climate where your money faces the double challenge of rising inflation and potentially having to last for many years. 

This is particularly poignant where you are invested in a default workplace pension scheme, as they will have set dates on which they change the underlying investments. This could pose issues if the default investment strategy does not align to your intended retirement date or factor in the impact of buying or selling assets during periods of market volatility.   

An example of this would be where the default is a lifestyle fund that seeks to de-risk as you approach retirement, the strategy sells your current holdings to lower risk holdings. During periods of market downturn this could be detrimental as you crystallise those losses and buy assets that are unlikely to have sufficient risk and reward to recover those losses and provide further growth. The biggest impact of this is likely to be in the final five years of your retirement journey when these lifestyle funds typically revert to fixed interest and cash. 

Want to review your retirement plans? 

If you have specific questions about funding your retirement lifestyle, or if you are feeling anxious about spending money in retirement, speak to us to discuss your options. 

Source data

¹ Class of 2022 UK retirement report consumer research of 2,000 UK adults for abrdn who were either planning to retire in the next 12 months, or who had retired in the 12 months prior. Research was conducted by Censuswide in late November / early December 2021.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

TAX TREATMENT VARIES ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE.