These final working years offer a valuable window to take stock, thinking not just about how much money you’ll need in retirement, but what life after work will look and feel like day to day.
Retirement is a major transition. While it often brings greater freedom and flexibility, it also raises some big questions: How will you manage your income? How long will your pension savings last? When’s the right time to take your pension? Do you have other assets you should make use of first?
These kinds of decisions can feel daunting, especially when they’re permanent or have tax implications.
That’s why planning ahead is so important. It brings clarity and helps you avoid common mistakes, like taking too much income too soon. It also makes it easier to balance your lifestyle goals with long-term financial sustainability.
With a clear, personalised plan in place, the shift into retirement can feel far less overwhelming, and much more like the positive, exciting new chapter it should be.
Lifestyle goals and cashflow modelling
A good retirement plan starts with a clear sense of what you want your life after work to look like. That might mean more (or less) time with family, more travelling, starting a new hobby, or simply enjoying a slower pace of life.
Once a picture of your day-to-day life in retirement begins to take shape, it becomes easier to estimate how much it will cost, and how best to fund it.
It’s also where cashflow modelling comes in. By using software to map out your expected income and expenditure over time and test various scenarios, you’ll be able to see how long your retirement pot is likely to last and what adjustments might be needed. It also helps surface opportunities, such as spending a little more in the earlier years or building in flexibility for care costs later on.
Phased and early retirement
Retirement doesn’t have to happen all at once. Many people choose to phase into it gradually, by reducing their hours or moving into part-time work before stopping completely.
Phased retirement can help smooth the emotional and financial transition. It gives more time to adjust, while easing pressure on pensions and other income sources.
Retirement income – the basics
- State Pension and National Insurance record
The State Pension provides a reliable foundation for most retirement plans. To receive the full new State Pension, currently around £12,000 a year, individuals need 35 qualifying years of National Insurance contributions.
It’s worth checking for any gaps in your record. Voluntary contributions can often be made to top up missing years, sometimes offering a strong return on a relatively modest outlay.
- Tax-free lump sum
Up to 25% of a defined contribution pension can usually be taken tax-free, up to a maximum of £268,275 (unless protection is in place). This can be taken as a single lump sum or spread over time.
There are pros and cons to both approaches. Taking it all at once may help with one-off expenses like mortgage repayments or home improvements. Spreading withdrawals may offer more control and help manage income tax.
- Pension drawdown or annuity?
Income drawdown and annuities are two common ways to turn a pension pot into retirement income.
Drawdown offers flexibility, with funds remaining invested and withdrawals taken as needed. Annuities provide a guaranteed income for life.
The right choice will depend on a range of factors, including risk appetite, health, expected longevity, and whether there are financial dependents. A hybrid approach is also possible, combining the security of an annuity with the flexibility of drawdown.
- Other income sources
Retirement income isn’t just about pensions. You may also draw from:
- Individual Savings Accounts (ISAs) – tax-free and flexible, great for topping up your income
- Other investments – such as general investment accounts (GIAs)
- Property – whether that’s rental income, downsizing, or unlocking value through equity release
- Business dividends – for those retaining shares in a limited company or family business
Coordinating all these streams is one of the areas where advice adds real value, especially when it comes to using your tax allowances and managing income in the most efficient way.
Tax planning in retirement
Moving from saving to spending brings a different set of tax considerations. This phase is known as decumulation and requires careful thought.
It’s important to:
- Make full use of your personal allowance, dividend allowance, and capital gains tax (CGT) allowance
- Withdraw from different pots in a tax-efficient sequence
- Avoid higher tax bands by spreading income across years
- Consider the impact of the Money Purchase Annual Allowance (MPAA) if you continue contributing after starting withdrawals
Smart tax planning can make a significant difference to how long your retirement savings will last.
Inheritance Tax and estate planning
From April 2027, more pension wealth is expected to fall within the scope of Inheritance Tax (IHT). These changes could affect how pensions are taxed on death, particularly for those with larger estates.
While the exact rules are still evolving, it’s a good time to review estate plans and understand how the proposed changes might apply.
Other estate planning considerations include:
- Keeping beneficiary nominations up to date
- Using annual gifting allowances
- Using a whole-of-life protection plan to cover any future IHT bill
- Making or updating your will
- Considering how future care needs might be funded
Inflation and longevity
Retirement could last 30 years or more. That’s great news, but it also means your income plan needs to stand the test of time.
Inflation is one of the biggest long-term risks. Over time, it can significantly reduce the purchasing power of your money, especially if your income is fixed.
Steps to consider include:
- Keeping part of your investments in growth assets (like equities)
- Adjusting withdrawals over time to maintain spending power
- Stress-testing your plan using cashflow modelling, against different life expectancy and market scenarios
Your plan will need to adapt as your circumstances change, but you should only take as much risk as you can afford and are comfortable with.
Why the final years before retirement matter so much
While financial planning is valuable at every stage of life, the one to two years before retirement are particularly important. Many decisions made during this time, such as how and when to access pensions, can’t easily be reversed.
This is when it makes sense to:
- Choose an income strategy that reflects your personal goals and risk appetite
- Decide when and how to take your tax-free lump sum
- Finalise your estate planning
- Reassess timelines and adjust if needed
- Align your finances with the life you want to live
Getting the right advice now can help avoid mistakes, make the most of your options, and give you the clarity to move forward with more confidence.
Talk to an Amber River financial planner
Every retirement journey is different. Whether you’re planning to stop work completely, reduce your hours, or simply want to check you’re on track, a financial planner can help.
By understanding what matters most to you, they can build a plan that brings together your income, investments, lifestyle goals, and legacy planning, all in a way that supports the life you want to live.
If you’re planning to retire soon, now is the time to take control and make sure your retirement is as secure and fulfilling as it should be.
Get in touch
To speak to an Amber River financial planner, call 0800 915 0000, or alternatively, use our contact form to set up an initial appointment.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
