Approaching or enjoying retirement

It depends on the life you want, when you stop work and where your income will come from. Rather than use a rule of thumb, we build a year-by-year cashflow forecast of your spending, pensions, investments, property and State Pension. We then test it against market falls, inflation, care costs and living to 100. The forecast shows whether you have enough, how much you can safely spend and how much you could pass on in your lifetime. Some clients find they can retire earlier, or spend more, than they’d assumed.

Possibly, but early retirement needs a plan for the years before your State Pension starts. Private pensions can usually be accessed from 55, rising to 57 from 6 April 2028. The State Pension age is 66, rising to 67 between 2026 and 2028. Retiring at 58 could mean funding around nine years from pensions, ISAs and other savings before the State Pension begins. We model how long your wealth needs to last, how to draw it tax-efficiently in those years, and how much room you have if markets disappoint.

Pensions advice and pre-retirement planning covers the five to fifteen years before you stop work, when your decisions have the biggest impact on the rest of your life. It means setting a realistic retirement date and testing it with a cashflow forecast. It also means making your final pension contributions while you’re still earning, and gradually adjusting investment risk. Then come the key choices at retirement:

• when to take your tax-free cash
• whether to use drawdown, an annuity or both
• how to fund the years before your State Pension starts
• which assets to draw on first, now that unused pensions will count towards your estate from April 2027.

The order matters more than many people realise, and the April 2027 inheritance tax change has altered the usual approach. Until now, many people spent ISAs and other savings first and left pensions untouched, because pensions usually passed free of inheritance tax. From 6 April 2027, most unused pension funds will count towards your estate. For some families, it may now be more efficient to draw more from pensions earlier and make gifts from that income. We model the options to find the lowest combined income tax and inheritance tax.

Not automatically. You can usually take 25% of your pension tax-free, up to £268,275 in total unless you have protection. Once withdrawn, the cash loses the pension’s tax shelter. Taking it in stages keeps a tax-free element in each withdrawal for longer. There are good reasons to take it, such as clearing a mortgage, bridging to other income or funding gifts. With pensions entering estates from April 2027, gifts that start the seven-year clock have become more attractive. Either way, it should be part of a plan.

Drawdown keeps your pension invested and lets you control how much you withdraw and when, but its value can fall and the income isn’t guaranteed. An annuity swaps some or all of your pension for a guaranteed income for life, removing investment risk and the risk of outliving your money. Annuity rates are much higher than a decade ago, and many clients now combine the two: an annuity to cover essential spending, and drawdown for flexibility and legacy. The right choice depends on your health, other income, attitude to risk and estate plans.

Early losses hurt more when you’re also withdrawing income, because you’re selling investments at lower prices. This is called sequence risk. We manage it by holding one to three years of planned withdrawals in cash or lower-risk assets, so you don’t have to sell growth investments during a downturn. We also build flexibility into your spending plan. Before you retire, we stress-test your plan against past market crashes, so you know in advance how you’d respond.

The 4% rule suggests withdrawing 4% of your portfolio in the first year of retirement, then raising that amount with inflation each year. It comes from US research into how long portfolios lasted over 30 years. For a £1.5 million portfolio, that’s £60,000 in year one. It’s a useful starting point but not a plan: it ignores tax, fees and your other income. UK-based studies often suggest a lower starting rate for retirements that could last 35 years or more. We prefer a flexible approach that adjusts withdrawals to markets and your circumstances.

It can. Once you take taxable income flexibly from a defined contribution pension, the Money Purchase Annual Allowance applies. From then on, your tax-relieved contributions to defined contribution pensions are capped at £10,000 a year. Taking only your tax-free cash, or buying a standard lifetime annuity, doesn’t trigger this limit. If you’re still earning or plan to pay large sums into a pension, plan the order of your withdrawals carefully.

Don’t rush. Keep the money in cash for a few weeks while you plan, split across different banking groups, because the FSCS protects £120,000 per person per banking licence. Next, decide what the inheritance is for: retiring earlier, drawing less from your pension, clearing a mortgage, helping your children or long-term growth. Then invest it in this order:

• Pension first, if you’re still earning. Contributions get tax relief at up to 45%, and carry forward can allow up to £240,000 in a single year. High earners may have a reduced (tapered) allowance. If you’ve already started taking taxable income from your pension, you can only pay in £10,000 a year.
• ISAs next. You can each put in £20,000 a year, so £40,000 for a couple.
• A general investment account for the rest. This uses your capital gains and dividend allowances, and can top up your ISAs each April.

A few points depend on what you’ve inherited and whether you need it:

• Shares or property take their value at the date of death, so selling soon afterwards usually means little or no capital gains tax.
• An inherited pension is often best left invested inside the pension. Taking it all out at once could mean a large income tax bill.
• If you don’t need the money, a deed of variation made within two years of the death can pass it straight to your children or grandchildren, keeping it out of your own estate for inheritance tax.