Retirement planning is about more than just a pension

One of the first questions to ask yourself is what you want from your retirement. And then, how do you plan to pay for it. You might be interested in securing a guaranteed income for the rest of your life, or you might prefer access to a lump sum, and more flexibility in spending your retirement pot. You might prefer a combination of the two, and to make sure your income doesn’t suffer too much after you’ve stopped working.

There are also tax considerations to think about when planning for retirement, including making sure you’re investing in the most tax-efficient manner (ideally by making the most of tax relief in a workplace pension, as well as other savings and investments). There are tax implications that come with withdrawing money from your pension too, either as income or a lump sum. After you’ve turned 55, you can generally take up to 25% of your pension savings in the form of tax-free income or lump sum(s). Any further withdrawals over your annual income tax allowance (either via drawdown or an annuity) will be taxed at your nominal rate. Taxation can be a bit of a minefield, so again, seeking advice is key.

Clients often feel concerned they haven’t accumulated enough in their pensions to last them through retirement. Which is why it’s so important to crunch the numbers and find out how much you have accumulated for retirement and how much you think you’ll need in retirement. Once that’s been established, your adviser can work out a financial plan that can help to cover any potential shortfall between the two. They might also use cashflow modelling to assess whether your pension and other assets are likely to be able to meet your retirement income objectives for the rest of your life.

Once that target has been established, it’s easier to factor in other assets alongside the pension. For example, you might have cash in the bank, investments in Individual Savings Accounts (ISAs), or rental properties that give you another source of income. Taking all of these other assets into account makes it much easier to create a realistic plan. In addition, getting a true sense of your net worth going into retirement gives you the opportunity to take any necessary action sooner rather than later.

It’s increasingly common to have accumulated several pensions from a handful of previous employers. In such cases, it pays to determine how much these different pensions are worth and where they are invested. Once that’s been established, you, and your adviser, can work out whether you’d be better off transferring those assets into a new pension more suited to your retirement plans and need for income or capital.

Poor returns and high pension charges can sometimes act as a ‘double whammy’ on a pension, eating into returns and leaving you with a much smaller pension pot than you could have built up elsewhere. However, older pension plans often carry exit penalties, and in some instances, transferring means losing valuable benefits – such as a guaranteed annuity rate – that you may not be able to get elsewhere. That’s why it’s really important to take expert advice from someone who knows the pitfalls associated with older pension products.

Talking of pitfalls, some people approaching retirement are keen to take their tax-free cash specifically to repay their mortgage or other debts. Perhaps in order to start retirement ‘debt-free’ wherever possible. However, this might not always be the best approach. Again, it’s important to consider your entire retirement pot before making any big decisions such as withdrawing a lump sum of your pension – because once that money has gone, you can’t get it back. The good news is that it may be possible to use other assets in your retirement pot that achieve a better result without giving up some of the advantages that a tax-free lump sum offers you.

When it comes to retirement planning, the pension (or pensions) you own are likely to be just one part of the puzzle. There are other elements that should be considered as part of your plan, including any savings and investments you hold, how you plan to pass on your wealth or use it to look after family members, as well as making sure the decisions you make on how you spend your retirement pot are as tax efficient as possible.

Retirement planning is a journey. And, just like with any journey, there’s more than one way to get there. It’s important to stay positive, build a plan that you’re happy about and that you can stick to, and make sure your plan is regularly reviewed to ensure it stays on track.