Funding the lifestyle you want in retirement

According to a recent study, only 25% of retirees feel very confident they’ve saved enough for retirement. Here are some tips to help make sure your money lasts as long as you need it to.

As food prices 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're approaching retirement or have already started taking money from your pension or other retirement savings, you wouldn't be alone in feeling a little anxious about the effect the cost-of-living crisis might have on your lifestyle in retirement.

In fact, according to abrdn’s Class of 2022 UK retirement report, where 2,000 recent and future UK retirees were asked about their retirement plans, only a quarter of people feel very confident that they’ve saved enough for their retirement.

Thankfully though there are a few things you can do to feel more confident about spending your money in retirement. And, importantly, to help make sure that your money lasts as long as you need it to.

1. 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’s important to think beyond this. Think about other potential sources such as individual savings accounts (ISAs) and bank account savings, as well as any rental income you get from properties you let.

And don’t forget the state pension. 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.

2. Watch out for unnecessary tax bills

Paying too much tax in retirement is a common pitfall, and one that could be easily avoided with a little bit of know-how and the right plans in place.

If you’re already taking, or plan to take, income from multiple sources, it’s important to consider how that will be taxed. When and how you take your money can make a big difference to how much tax you pay and how long it will last. Taking money little and often can make all the difference when it comes to reducing your tax bill.

When it comes to your pension savings, you can usually take 25% tax-free, 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’ll need to pay income tax on anything over your tax-free cash limit and any annual personal income tax allowance you get.

It’s likely that the more money you take, the more tax you’ll 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 a number of years and taking just enough to stay in the lowest tax band you can, you could keep more of your money overall.

Another way to avoid an unnecessary tax bill is to make the most of your ISA savings.

You don’t pay tax on any investment growth or interest you earn, or on the money you take from an ISA. So it’s 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’ve 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’s a lot to figure out. 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’re planning on working in some capacity for a little longer.

Getting some advice about your retirement plan can really help clear up any confusion and give you confidence that you’re taking your money in the best and most tax-efficient way for you.

3. Keep track of your investments

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

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

However, if you’re 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.

Professional advice could provide some welcome reassurance if you don’t feel confident choosing and reviewing your own investments so that you get the right balance between growth and smoother returns.

4. Speak to a retirement specialist

If you have specific questions about funding your retirement lifestyle, or if you’re feeling anxious about spending money in retirement, speaking to a financial adviser could help you understand your options.

Find out how abrdn’s financial planning and advice services could help you with retirement planning. Book your free, no-obligation call today.

ii is an abrdn business. abrdn is a global investment company that helps customers plan, save and invest for their future.

The information in this article should not be regarded as financial advice. Information is based on our understanding in May 2023. The value of all investments can go down as well as up, and you may get back less than you paid in. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment.

Colin Dyer is a client director and financial planning and retirement expert at abrdn.