How to make the most of your pension savings

The golden years, a time of freedom and autonomy, the years of dedicating yourself to the working world are suddenly over and a new chapter begins.

Whether entering retirement with a big sigh of relief that the working mantra is over, a sense of reluctance to leave it behind, or a mixture of emotions – retirement is a significant life event. It’s a big change – and not only does it turn our daily routines upside down, but more importantly, it puts our finances firmly in the spotlight.

For many, entering retirement is a welcome change – suddenly being able to repot plants on a random Wednesday, with only the weather to consider, feels like a cherished privilege not previously enjoyed. On the other hand, for some it can be a disconcerting time, as they wonder how to fill their days and where to find the sense of purpose and structure that work once provided.

Whatever your personal feelings on this new chapter, one shared truth remains: your financial situation is going to change. The steady income that once supported your lifestyle is likely coming to an end, leaving your financial security in the hands of your accumulated wealth – and the planning and choices you make from here.

The fact we are all living longer is a triumph of modern society. According to the Office of National Statistics, life expectancy for a UK male rose from 70 years in 1980 to 78 in 2022, and for a female, from 76 to 82. This new reality means we need to fund our retirement for much longer.

Ensuring our money continues to work hard for us throughout retirement is no longer a luxury, but a necessity. The challenge is no longer just about saving for retirement; it’s about investing throughout retirement to maintain purchasing power and secure our financial future.

This article’s aim is to help you begin the journey from financial uncertainty into confidence by providing a clear framework for organising your assets, maximising your income, and building a resilient plan for the future you want. 

As Benjamin Franklin wisely said: “To fail to prepare, you are preparing to fail”. A lack of plan is like you’re drifting rather than driving. You’re relying on things to simply work out – and not only can that be quite anxiety-inducing, but it also makes it far less likely that you’ll create the financial setup that truly supports the life you want.

Now, let’s be clear – planning doesn’t mean controlling every single detail, as that’s rather laborious and life will inevitably disrupt your arrangements. It means putting your best foot forward, choosing your direction with full intention, especially when it comes to making the most of tools like tax efficient wrappers.

Understanding your new financial landscape

So, where to begin? The foundation to any retirement plan is to understand your new financial landscape.

Will I have enough? Is my pension big enough? Will I run out of money? Understandably, these are extremely valid concerns and impossible to provide a ‘blanket response’, because it is just so dependent on your individual circumstances. The real answer lies in creating a plan, and that begins in understanding exactly where you stand today.

A powerful starting point is to undertake a personal financial audit. Take some time to list all sources of retirement income and assets you have, for example the State pension, any workplace or private pensions, ISAs, GIAs, property, or cash, followed by all liabilities and essential outgoings, for example mortgage, rent, utilities, insurance and general daily living costs. Now list those ‘luxuries’ – this is important for making your plan realistic. Think about holidays, dining out, and similar extras you’d like to include.

This gives you a clear snapshot of your current position and serves as the foundation for every decision that follows, providing a realistic view of what you’ll need each year. Now it’s time to turn this into a long-term forecast.

Designing a strategy to draw down your savings can be complex and daunting. This is precisely where professional support can help. To assist you in this process, Moneyfarm offers Guidance+, a service designed to provide tailored support without giving regulated financial advice. Guided by a qualified investment consultant using professional tools, Guidance+ helps you visualise different lifetime cash flow scenarios, stress-test your plan against market events, and ultimately build a robust strategy that aims to provide a steady income for your future.

The engine of your retirement is your pension

Now that we have a rough idea of what you’ll need year by year – within the parameters of your means – we can start looking at some of the key players and strategies that can help give you the best chance of long-term financial security.

The engine of your retirement is your pension and as we now know could need to last for potentially 20-30 years. Up until now, your pension has been quietly accruing in the background yet now the key challenge is making it last the rest of your lifetime. 

If not done so already, it could be worth consolidating your pensions as managing one pension instead of many is not only simpler, but it can often reduce the overall fees you pay, leaving more of your money to work for you. However, before you consider this, you should check that you are not loosing any valuable benefits linked to those pensions.

Self-Invested Personal Pensions (SIPPs) are a flexible type of pension that puts you in control. Any remaining funds stay invested, with the potential to continue growing over time. Given your retirement could be a 20-30 year journey, keeping your pot invested is vital to outpace inflation and boost your finances for the long term.

When deciding how to access your money – taking into account the personal needs we discussed earlier – you can also consider additional factors to help make your withdrawals as tax-efficient as possible. For example, you’re entitled to 25% of your total pension pots completely tax-free, which you can take either at once or in instalments. Consider what would be most beneficial to do. For example, some may want to pay off their mortgage, which they could do using the tax-free amount. For others, taking this amount as a lump sum may mean leaving it in a bank account where it’s gradually eroded by inflation. By not withdrawing the full amount at once, your capital remains invested, giving it the opportunity to keep growing, helping protect your savings from inflation and potentially making them last longer.

After taking your tax-free lump sum, any further withdrawals from your pension are taxed at your marginal rate. That’s why it’s important to consider which tax rate you’ll be paying when accessing different amounts.

Consider this simple example: you need £60,000 of income in a given year. If you take all of that from your pension, a portion of it will be taxed at the 40% higher rate. But a more tax-efficient approach could be to create a ‘waterfall’ of withdrawals.

1. First, draw from tax-free sources. If you have an Individual Savings Accounts (ISA), you can take income from it without paying any tax.
2. Next, withdraw from your pension, but only take enough to stay within the 20% basic-rate tax band.
3. Finally, only if you need more, you could draw further from your pension and pay the higher rate of tax.

This layered approach gives you a flexible and tax-smart way to fund your life, ensuring you don’t pay more tax than you need to.

Which introduces our next key player essential to any retirement plan: ISAs. Particularly, Stocks and Shares ISAs could be a good option if you’re not looking to use all the funds in the short term. As all withdrawals from ISAs are tax free, Stocks and Shares ISAs can be a great source of income to supplement pensions in your retirement and manage your overall tax bill. Similarly, remaining funds can continue to be invested.

It’s important to remember that this example is for illustrative purposes only and does not constitute financial advice. The right strategy for you will always depend on your unique personal circumstances, and we recommend seeking professional financial advice if you are unsure about the best course of action.

Regularly review your plan

Of course, understanding your other assets is important too. Making you sure you understand the implications and limitations of all the ‘pots’ you have is crucial.

With all of this in mind, it’s essential to ensure your plan is resilient and well-protected for the long term. Staying in diversified portfolios is important to regenerate the growth needed to outpace inflation. Remember, your plan shouldn’t be static, as rigidity lacks flexibility. It also needs to be reviewed regularly to ensure it’s in line with your life and goals.

The journey into retirement is filled with new freedoms and opportunities. While the financial side of this new chapter can seem daunting, the goal is to transform uncertainty into confidence.

By creating a clear snapshot of your finances, organising your pensions into a flexible SIPP, and using a smart, tax efficient strategy to draw your income, you are no longer drifting. You are taking control and actively steering towards the future you want.

Navigating your golden years is a significant journey, but it’s one you don’t have to take alone. Whether you need help creating a long-term forecast with Guidance+ or want to discuss how to put your plan into action, our investment consultants are here to help you every step of the way.