Seven pension tips to get you retirement ready
What are the main items to put on your to-do list in the latter stages of saving and investing for retirement?
To tackle this topic, Kyle is joined by Craig Rickman, personal finance editor at interactive investor. Craig shares seven key considerations to bring your retirement plans into sharper focus.
In the episode, Kyle and Craig discuss the following:
- Firming up your pension plans (00:59)
- The merits of consolidating pensions (04:53)
- ISAs, the state pension, and boosting pensions in the run-up to retirement (06:51)
- Keeping money invested, buying an annuity, or doing both? (13:58)
- Reducing risk (or not) in the run-up to retirement and ideas for building a defensive buffer (18:09)
- 'Bucket' strategies of multiple portfolios for different time frames (25:14)
The 25% pension tax-free lump sum: take it all at once or in stages? (26:13)
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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to On The Money, a weekly podcast that aims to help you make the most out of your savings and investments.
Before we start, I just wanted to say that we’d love to hear from listeners. So, if you have a pension or investment question that you would like us to tackle, or you have an idea for an investment or pension topic that you’d like us to cover on the podcast, then do get in touch by emailing: OTM@ii.co.uk.
Now, the focus of this episode is one that we think will hopefully resonate with a lot of our listeners.
We’re going to be talking through top tips and tactics ahead of retirement in regards to how your pension is invested.
Joining me to tackle this topic is Craig Rickman, personal finance editor at interactive investor. Craig, great to have you back on the podcast again.
Craig Rickman, personal finance editor at interactive investor: Great to be back on, Kyle.
Kyle Caldwell: So, Craig, the way you’ve approached this is by focusing on a hypothetical scenario of someone being around five years away from retiring.
You’ve come up with seven tips to help people get ready for retirement. The first tip is to firm up your retirement plans. So, how does someone even get started in that scenario? How do they practically firm up their retirement plans?
Craig Rickman: Well, probably the first thing is the five-year point. When you’re five years from retirement, obviously it’s edging closer. But there’s also time to put things right if there’s a shortfall in terms of the savings that you have compared to where you need to be. You’ve still got a bit of time to make the necessary tweaks to get yourself in a place where you can retire on your own terms.
But, yeah, when you get to five years from the point when you’re looking to retire, then your plans for retirement, or your plans for when you’re packing up work, really need to start to firm up.
Your focus needs to sharpen, and it’s really about drilling down into what you want your retirement to look like. What are the things you want to do? How much are those things likely to cost you? Is your preference for a hard stop or to phase retirement in gradually over a number of years?
Perhaps you’ll continue to work part time in retirement. There’s no one-size-fits-all to it. Everyone gets to select the retirement that they want, and retiring on your own terms obviously means different things to different people. It’s a personal thing.
But, yeah, five years is the point where you really [need to] start to have a real clear view of what you want your retirement to look like.
Kyle Caldwell: In terms of working out how much you’ve currently got in your pension when you’re around five years away from retiring, it’s a case of simply going through every pension you’ve got.
Some of them you might have to track down via the Pension Tracing Service, which can be very useful. Then work out what you’ve got, and where you want to get to, to ideally have x amount to live off in retirement, or to fund your lifestyle in retirement.
Craig Rickman: Yeah, absolutely. One of the key things is to round up all the savings that you plan to use for retirement.
So, typically, that will be pensions, or the largest pot or pots, because people get pensions through their workplace, they have done since auto enrolment, but also long before that as well.
So, it’ll be rounding up any pensions that you have, any savings, any investments. And like you say, making sure you know where they are and how much money you’ve got to help you live the retirement that you want.
But, as you say, some of these pensions might need tracking down, and you can use the Pension Tracing Service. You can also contact old employers.
That’s a really useful exercise to track down these pensions, especially if there are some that you’ve forgotten about. It can be quite a nice surprise to find a pension that you perhaps didn’t think existed.
In some cases, if these pensions are old, they might be worth quite a bit of money, especially if they’ve had time to compound over the years.
That provides the really key yardstick of where you are before you edge towards retirement and can inform some of the key decisions you make over the next five years.
Kyle Caldwell: Once you’ve rounded up all your pensions, tactic number two that you’ve come up with, Craig, is to consider consolidating those pensions.
For me, the main benefit of consolidating is that it’s easier to manage. It’s all in one place. Another benefit is that you can end up paying less through consolidating.
Is there anything further to add to those points, Craig?
- Five reasons to consolidate your pensions and three to think twice (https://www.ii.co.uk/analysis-commentary/five-reasons-consolidate-your-pensions-and-three-think-twice-ii536542)
- Is 4.7% the new magic number for sustainable pension withdrawals? (https://www.ii.co.uk/analysis-commentary/47-new-magic-number-sustainable-pension-withdrawals-ii536734)
Craig Rickman: No. That’s absolutely right. Consolidating can be a really worthwhile exercise, just getting several pensions and putting them together under one roof. Like I say, it just makes things easier to manage.
You can have a very clear view of what that pot may provide, especially if you punch the figures, or the pot sizes, into pension calculators against the size of the pot or the level of income that you might want in later life.
So, rounding them up can be helpful with that. It can also be a really good way to manage investment risk as you approach retirement. We’ll certainly be coming on to that. But you can make some of the key decisions on how you manage risk in those key years before you approach retirement.
When you’re looking to consolidate, there are some things to watch out for. Some pensions may contain some valuable guarantees that would be lost if you switch them.
One example would be guaranteed annuity rates on retirement annuity contracts. These are kind of old pension schemes from the 1980s. With newer pension schemes, any kind of guarantees or valuable benefits are unlikely unless it’s a defined benefit pension scheme. But in terms of defined contribution, they typically apply to older schemes.
But either way, it’s worth checking that you’re not going to lose anything really valuable by switching.
Kyle Caldwell: The next tip that you’ve come up with is to look beyond pensions. So, you may have ISAs, and you also need to factor in the state pension. Obviously, if you retire, say, in your late 50s or early 60s, you’re not going to get the state pension at that point, but you will in future, and you can plan accordingly to factor that in at a later stage.
Craig Rickman: Absolutely. Yeah. The state pension is a really important source of retirement income for basically everyone. From April, it’s going up to the full state pension. The full new state pension is going up to around £12,500 a year.
It’s a really important source of retirement income to meet day-to-day costs. So, as you approach retirement, it’s worth getting a state pension forecast to check that you’re on track to get the full amount. You need 35 years’ worth of qualifying national insurance contributions or credits. If there are any gaps in your records, you might be able to plug them by making additional national insurance contributions. So, yeah, that’s a really important thing to check and to get the full amount. Your retirement lifestyle will thank you if you do that.
Anything else that you plan to use, that could mean stocks & shares ISAs, buy-to-let properties, cash savings, or you could own a business that you’re perhaps looking to sell or pass down to younger generations and have some involvement with.
The point is that you’re looking at everything. You’re looking at all the sources that you plan to generate retirement income from, and you’re looking to make sure that you’ve accounted for them by the time you reach retirement.
Kyle Caldwell: I appreciate that this is a big topic that we could probably do the entire podcast on, but where do you sit on the debate between ISAs and pensions in terms of which one would you look to withdraw from first?
Craig Rickman: Yeah, that’s a big question. The considerations around that have changed recently in light of the government’s decision to bring pensions into the inheritance tax net from April 2027.
Historically, people would look to draw - or maybe currently to some extent - from ISAs first. The main reason being that pensions are inheritance tax free, so it could be quite a useful estate planning tool if you’re draining the ISA money first and then leaving the pensions to be inheritance tax free.
But in light of the new changes, that appears to be reversing. So, people are looking to perhaps draw pension income first and leave ISAs untouched.
Those are decisions that you can park for the time being if you’re five years from retirement. But it does tap into a crucial point about having multiple tax wrappers when you get to retirement. So, having money in a pension and in an ISA can just broaden your options and how you draw retirement income.
Pension income - other than the amount you can draw tax-free, which is either normally 25% up to a maximum of £268,275 - is taxable.
It doesn’t necessarily mean you’ll pay tax because everyone gets a personal allowance, a tax-free allowance. But ISA withdrawals are tax free. So, it just means that you’ve got plenty of options on how to draw income, and keeping tax bills low in retirement is a really important thing to do.
So, that’s another thing to get ready within your portfolio as you approach the point that you plan to pack up work.
Kyle Caldwell: Once you’ve rounded up all your pensions, and considered potentially consolidating, what happens in a scenario where you look at how much you’ve got and realise you’re quite a bit off where you want to be, ideally? There’s quite a considerable gap between the amount you’ve got in your pension today and the amount you’d ideally like when you retire? What are the ways that people can try and address that gap, Craig?
Craig Rickman: Good question. So, there are a few. One is to delay your retirement, so push it back to give your savings more time to grow and give yourself more time to pay money in. That leads us to the second one, which is just to beef up your pension savings.
That’s why it’s really important to look at this when you’re few years out from retirement because you’ve still got time to top up. It might be topping up your pensions, it might be other assets such as ISAs, for example. But you can start to give your savings a shot in the arm before you either buy an annuity, go into drawdown, or do a bit of both.
In the years before retirement, you’re typically earning good money, or as much money as you would have earned in your career unless you’ve started to take a bit of a backseat. So, in that example, if you’re earning lots of money and paying lots of tax, that’s where pension funding can become key because you get upfront relief at your marginal rate.
It’s also the time if you’ve received an inheritance, for example, that you can use things such as carry forward relief. You don’t have to have received an inheritance, you could have just built up some cash savings. But you can use things like carry forward relief as well.
So, you have time to do something about it, which is either boost your savings or maybe rethink the point that you plan to retire.
- When will you get your state pension? (https://www.ii.co.uk/analysis-commentary/when-will-you-get-your-state-pension-ii536404)
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Kyle Caldwell: Carry forward relief is when you can put money into your pension when you’ve not put the full amount in over the three previous years. Is that correct?
Craig Rickman: Yeah. So, it allows you to tap into unused pension allowances from previous tax years. So, there’s an annual allowance on what you can pay into pensions, which is the lower of 100% of what you earn or £60,000.
For example, if you earn £70,000 a year, the most you can put into pensions is £60,000 under the annual allowance.
So, if you do have unused allowances in previous tax years, and as long as you’ve been a member of a UK-registered pension scheme during those years, then you might be able to bring forward allowances from those tax years and potentially pay in more than £60,000.
So, it supports those who have got either big cash savings or those who have received an inheritance, have a big income, and want to make up for lost time.
Kyle Caldwell: Next up on our list of tips and tactics ahead of retirement is to consider whether you’re going to keep the money invested in retirement, take out an annuity, or do a bit of both. Craig, could you talk through each of these options?
Craig Rickman: I can indeed, yeah. Essentially, there are two retirement income products that you can use for your pension. The first, as you note, is an annuity, which is a guaranteed income. If it’s a lifetime annuity, that’s it.
That means, yeah, for life. So, you trade some or all your pension savings for that facility. So, you no longer have access to that pot of money, but instead you get this guaranteed income. It’s paid to you typically every month. There are various things that you can choose and how that income is paid to you.
So, you can have it paid to your spouse or carry on to your spouse if you pass away. You can build all sorts of other guaranteed periods into them as well. So, should something happen to you, it will be paid for a certain number of years. There are various options that you can take with it.
But the thing with annuities is that they’re rigid. So, once you’ve bought one and the cooling-off period has passed, you can’t change your mind – it’s fixed for life. So, although they provide a lot of security, they’re incredibly rigid. You need to be pretty certain before you buy one. So, that’s one option.
The other is income drawdown, where you keep your money invested and draw income flexibly. That’s the popular option, or it has been since something called pension freedoms was introduced in 2015.
So, that’s what most people tend to do. Five years from retirement is the point where you may start to think about which one you want to do.
You can do a bit of both. And I think that's the beauty of it, it's trying to find the right way for your personal circumstances. Some people will do a bit of both. So, they might use an annuity to meet everyday costs and then have a drawdown pot for flexible spending. Some people might want to just have the whole lot in drawdown.
It would depend on a number of things. It would depend on how much other secured income you’ve got. Perhaps you’ve got defined benefit schemes, for example. If you do, if you’ve got a generous defined benefit scheme, that may open the door for using the rest of your savings, or your defined contribution savings, in a flexible way.
Essentially, you get to choose, but five years is a really important time to think about it because that may inform some of the decisions you make, particularly on how you invest your savings in the run-up to retirement.
Kyle Caldwell: That’s the next point we’ll come on to. I just wanted to briefly reiterate that it’s important to bear in mind that with the annuity route, once you buy an annuity, you can’t reverse the decision.
If you put it off, you tend to typically get a better rate in terms of annuities the older you are.
