Pensions case study: the final yards to retirement and beyond

The final years before retirement are crucial for every investor. Not only is the clock ticking to make sure you’ve tucked enough away to pack up work on your own terms, but your preference for drawing later-life income should be firming up.

From selecting the right tax wrappers to employing a suitable investment strategy, these decisions aren’t always straightforward. And while everyone’s financial situation is unique, it can be helpful to learn how others are approaching this key milestone.

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I recently spoke to an investor who is firmly in this camp. He’s 58 years old, married with two adult children and currently mapping out his path to retirement - and beyond. This includes gradually phasing out work, if possible.

“The kids are out of uni and off the payroll, so we’re in the accumulation phase now, thinking how to make the most of our investments,” he says.

“My goal is to retire at age 63 but I hope to drop down to four days a week for a period, then to three. Though this will depend on work being amenable.”

The investor recently switched from self-employed to employed. As with any notable life event, this has prompted him to review his finances.

With retirement edging into view, the investor aims “to make the most of any pension and investment opportunities” in the next five years, with a key focus on tax efficiency. But as with any well-rounded financial plan, funding a comfortable retirement isn’t his only goal: continuing to support his kids financially and getting ahead of expected future inheritances are also on his radar.

Before we delve into how he intends to address these goals, let’s take a glance at his current portfolio.

• Pensions

Self-invested personal pension - £240,000

Current company pension - £50,000

Wife’s pension - £10,000.

Defined benefit (DB) pensions - £10,000 a year, him and his wife combined

• Savings and investments

Stocks and shares individual savings account (ISA) - £25,000

Company shares - £40,000-£50,000

Instant access savings - £10,000

• Business affairs

His business is still running, and he owns 51% of the shares. For tax reasons, he has made his children shareholders. He hopes the dividend payments will give them a head-start in life.

He is unsure whether the business has sufficient value to realise a healthy lump sum to beef up his retirement wealth. But says someone “might want to buy it for the name”.

• Debts

The investor and his wife cleared their mortgage six years ago, so will enter retirement debt free.

No-nonsense investing style

His approach to investing is very much to keep things simple, and not try to overcomplicate matters. His ii SIPP is wholly invested in the Vanguard LifeStrategy 80% Equity fund.

“I don’t mess about - I just diversify, leave it for the long term, and be wary about incurring large fees.”

The investor’s final point – the importance of keeping costs low - is reaching the ears of more and more people. Every pound you pay in charges that isn’t backed up by better results, is a pound less for your future.

“That’s why I came to ii,” the investor says. “I didn’t want to pay an arm and a leg to manage my investments.”

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When it comes to tax wrappers, the investor’s immediate focus is to plough as much into his pension as possible – so ISAs are currently taking a back seat.

This includes maximising his employer’s contribution and paying in any work bonuses to give his pension savings an added shot in the arm and swerve higher rates of income tax.

Sources of help

Even the most sophisticated and experienced DIY investors may need expert help every now and then, particularly in the retirement planning arena. The pension landscape can be a maze at the best of times, and the margin for error is often narrow.

The investor sought advice from a regulated financial planner just before Christmas, something he says proved valuable.

Rather than pay an adviser an ongoing fee to look after his investment portfolio, he prefers to access regulated advice on an ad-hoc basis whenever he feels he needs it.

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As this means he assumes the portfolio management responsibilities, the investor appreciates the benefits of doing his own research, boning up on investment and tax matters where possible.

“I’ve been watching videos to work out how to withdraw tax-free money from my SIPP to fund the first four years of retirement before my DB pension and the state pension kick in.”

Both his and his wife’s DB pensions kick in at age 65, and both have sufficient national insurance records to pocket the full state pension once they each reach 67.

The investor’s spouse is four years younger than him, so income here will be staggered over several years. This is something they’ve accounted for.

If everything goes to plan, he will start to draw from his portfolio in around half a decade. As such, he’s already started to ponder the best way to draw retirement income.

With his pension savings, the decision essentially comes down to two options. Either keep his pension invested and take income flexibly using drawdown, or buy an annuity and secure a fixed, guaranteed income for life. This isn’t a binary decision; he can choose a mixture of two.

At the moment, he plans to keep the money invested and opt for income drawdown, and so has no desire to derisk his portfolio to protect against market falls shortly before retirement. But says he’ll seek one-off advice from a financial planner to make sure he does the right thing.

Family matters

Something many of us may find difficult to overlook is the prospect of inheriting assets from older generations. And the investor is no exception.

“My wife and I both have elderly parents and at some point expect to get some significant windfall from these legacies. But obviously we don’t know when we will receive these,” he says, going further: “We haven’t factored these into our financial plan as things could change but it’s something we can’t really ignore either.”

Over the coming years in what’s been dubbed “The Great Wealth Transfer”, £5.5 trillion in assets is set to pass down generations. But whether this money will end up in the pockets of younger cohorts when they need it most is another matter.

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The investor is conscious of this, and so seeks to financially support his children right now.

“We learnt from my in-laws as they’ve been generous with their legacy,” he says. “They sat us down 20 years ago and said if you’re in need of any money now, you can draw some.”

“When people live longer, it means the inheritance comes later. If we feel we’re in a place where we can pass wealth down, it makes sense to do it. There are the tax benefits too.”

Words of wisdom

So, what learnings would our investor share with younger cohorts? Well, one tip is to “get a good understanding of the UK tax regime and its advantages and how you can benefit as result”.

The investor also says it’s key to build knowledge of financial matters as soon as possible. He purchased an investing book many years ago, something he describes as a “light-bulb moment to understand how to manage our money”.

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A final pointer is to set out and prioritise your financial goals from an early age, a task that he’s now reaping the rewards from.

“When my wife and I were younger, we had very clear priorities, which were to clear the mortgage as soon as possible, and to get our kids through uni without debt. Our pension funding might have suffered, but we’re happy with that way of thinking, and can now make up for lost time.”