It’s here at last! Whether you were counting down the days or dreading life after work, retirement always arrives in the end. And that’s why it’s best to be prepared.

Here are some questions to ponder as the big day approaches:

1. How much will I need per month – at the very least – for the rest of my life?
2. How long can my savings last, given my response to the previous question?
3. How will the choices I make affect the tax I pay?
4. And do I want to leave an inheritance for the next generation?

This probably won’t be the first time you have considered such questions. But like a surgeon’s team making sure you have no allergies and that it is indeed the left leg you want to be operated on, it’s an essential retirement checklist to consider and reconsider.

Make sure to answer these questions before thinking about that first post-retirement getaway or helping the children onto the property ladder. 

Your choices

No one can go back in time and plug all the gaps in their savings, but we all do have four general options when it comes to how we spend what we have:

1. Be flexible and take regular drawdowns.
2. Take it all in one go or in a series of smaller lump sums.
3. Buy a secure income known as an annuity.
4. Mix and match.

Be flexible

You can take a tax-free cash lump sum up front worth up to 25% of your total pension pot from the age of 55 (rising to 57 in 2028) and then a regular income that you can change at any time.

But how much do you need and how much can you afford to draw out per month? What would constitute a sustainable rate of withdrawal?

One way of managing your money is by withdrawing a specific percentage, say 4%, and adjusting the amount withdrawn each year for inflation. But would that give you enough money to live on in the manner you have become accustomed to and how long might it last?

Also, might a ‘dynamic spending’ approach help your money go further, by enabling you to adjust what you withdraw each year based on how your investments fare, subject to a floor and ceiling?

Our research¹ shows that such a dynamic spending approach can give you income stability while reducing your risk of running out of money. For more on this, read ‘How to spend your pension’ by my colleague Andrew Marker.

Individual lump sums

Alternatively, you can take a series of smaller lump sums at your discretion or the whole lot in one go.  In this case, 25% will each time be treated as tax-free, with the rest forming part of your taxable income.

Just remember that if you take out a very large share, or even everything at once, you could be saddled with a hefty tax bill. Remember also that this money is there to fund your retirement over many years – so use it wisely.

Buy an annuity

Buying an annuity means you get a guaranteed income for life, or at least for a set number of years.

We don’t offer these at Vanguard but if you hold a self-invested personal pension (SIPP) with us we will happily transfer your pension to an annuity provider once you’ve chosen one. We can either pay you your tax-free cash first or transfer the whole amount to them. It's up to you.

Mix and match

You are also not tied to just one option – you can combine these choices over time to suit your needs. For example, you can take out some of your tax-free cash lump sum but leave the rest of your pension untouched for years.

However much you have, these options allow you to take more control of your finances. Just make sure your pension provider doesn’t charge you for any withdrawals. At Vanguard, there are no withdrawal charges.

For a closer look at the drawdown options with Vanguard and how we guide you through the process, read this article.

And keep an eye on the tax you may be liable for with each withdrawal. For more on this, read ‘How much tax might you have to pay in retirement?’.

Should I continue to invest?

You can also choose any of the above options and continue to pay into your pension. However, you may not be able to pay into your pension past the age of 75 – you certainly won’t get tax relief on any contributions past this age And once you start to draw a taxable income, the amount you can deposit into your pension to claim tax relief falls from a maximum of £40,000 to just £4,000. For more on this, read ‘Saving strategies for the semi-retired and almost retired’.

You can also stay invested – many believe they can draw and live off the natural income generated by their investments, such as interest and dividends. But a desirable income may mean making increasingly risky investments. 

So instead it may be worth considering a total-return approach, where you dip into the capital too.

Everyone wants to make their pension go further, but we certainly don’t want to take risks that may leave us with less.

What about after retirement?

It’s possible that you’ll still have money left over when you die. This isn’t something many of us like to think about. But retirement is a time when people start considering the legacy they’ll leave behind.

If you die before using all your pension, what remains will be passed onto your beneficiaries. And if you die before reaching the age of 75, it will be passed on tax free². If you’ve bought an annuity, however, check the fine print – these sometimes do not allow you to pass on any remaining assets as part of their guarantee of a regular income.

If you die after 75, your beneficiaries are taxed on any pension income they flexibly draw or are paid at their marginal rate of income tax when they receive it. Just remember to inform your pension provider who your beneficiaries are as it can help smoothen the process.

It’s also worth thinking about what might happen if you are no longer able to manage your own affairs due to illness. Make sure you have a nominated family member who can take on a power of attorney if you are incapacitated. And remember to write a will that clearly states your wishes once you’re gone. For more on this subject, read ‘Managing your retirement finances against the risk of cognitive decline’.

If applicable, you can also discuss with a financial adviser how lifetime gifts or trusts can help you leave something to the next generation with the least possible tax bill.

There are many ways you can manage your money and make it stretch further, even if you feel you haven’t quite saved enough or are worried about an economic or market downturn. Our recent listicle offers 10 retirement tips for weathering the storm when investment markets are weak.

But it’s not just about our retirement money. If you’re planning to leave something to your next of kin or favourite charity, make sure everything is in place. And then relax. You’ve probably worked hard to get where you are right now.

So enjoy it! Live the retirement you want for yourself. You’ve earned it.

 

¹ Sustainable spending rates in turbulent markets, Ankul Daga, CFA, David Pakula, CFA and Jacob Bupp, Vanguard Research Note, January 2021.

² Subject to a lifetime allowance check.