How to maximise retirement choices

Retirement used to be a straightforward process for most people involving a single set date, a few kind words from the boss, drinks in the pub and then, if you were lucky, a couple of decades of pottering.

But that is no longer the case. In recent years there has been much greater flexibility and big changes in the way people choose to end their working lives. And this new, more malleable retirement landscape comes with a whole new set of decisions and plans to address, including the basic but crucial question of when to retire.

When deciding on this, there are two aspects to consider: personal – your own perspective on the prospect of a very different lifestyle – and financial.

Nick Onslow, chartered financial planner at RU Group, says: “It is easy to look at retirement as another life stage, but this is a big change in your life and it needs to be managed.”

It’s important to give serious thought to the realities of retired life, how you will spend your time once you stop working and whether the increasingly popular option of a phased or gradual reduction in hours or responsibility might be a good idea.

“Phased retirement is increasingly popular,” says Steven Cameron, director at pensions provider Aegon. “Continuing to work part-time rather than stopping completely doesn't just help financially, it also allows you to transition your overall lifestyle. Working full-time one day and retiring completely the next can be a shock to the system.”

As far as the financial practicalities of retirement timing are concerned, there’s plenty of leeway. If you have a pension it will include a specific retirement date, at which point you will be invited to access the cash. But if you choose not to, it will remain invested.

So if you want to shift your pension retirement date back or forward beforehand, it’s easy. You are allowed to access pensions at any time from age 55 or, from 2028, 57.

Cameron says: “Most pensions, and all more modern pensions, allow you to change your retirement date. Defined-benefit (final-salary-type) pensions make an actuarial reduction if you want to take benefits before the scheme retirement age.”

You can receive the state pension from age 66. You can’t claim that early, but you can defer drawing it, boosting the amount you subsequently receive by 1 per cent for every nine weeks of deferral – or 5.8 per cent a year.

Do you have enough to retire?

The key questions when assessing these dates is whether your pensions plus other resources are sufficient for you to enjoy the lifestyle you want and will last for the rest of your life. You also need to consider whether working longer could significantly boost your retirement prospects.

“Continuing to work for a couple more years means you'll continue earning and you can keep contributing to a pension," explains Cameron. "Also, whatever funds you build up in your pension won’t have to last for as many years in retirement."

Pre-retirement planning is one of the key times at which the input of a specialist adviser can be very useful, because they are well-placed to take a holistic view of your assets and help you establish how much you’re likely to need when you stop working. They have computer programmes that model how long your money could last under different scenarios.

Lorraine Denton, chartered financial planner at Punter Southall, says: “The first question a client asks is always, how much do I need to retire? My first question to them is what are your goals and objectives, and what assets, investments and liabilities do you have for us to work with? My next question is how much money will you need in retirement? It seems simple, but most clients aren’t sure.”

If your retirement resources don’t meet your aspirations, it’s time to consider the options, says Denton. “This is when we have to look further at the budget – maybe consider downsizing to release cash – or acknowledge that all goals and objectives cannot be met.”

It can be really difficult to engage with the realities of retirement when it’s still, say, a decade away, but thinking about these questions early makes them much easier to resolve. So what else should you do at that point?

“When you move from saving for retirement to being serious about retirement, your planning needs to focus on what you will spend when you stop working," says Onslow. "Running a spreadsheet and working out what your essential or non-discretionary spending could be is key. If you know what you’re likely to get through in a year, you can work out how much of a shortfall there may be and take appropriate action."

How to boost your retirement savings

The most obvious way to plug an anticipated shortfall in your retirement income is to boost your pension contributions, so if you’re in a position to pay in more of your salary each month, then do so. Channel one-off windfalls such as annual bonuses or inheritances that way too.

You may also be able to take advantage of salary sacrifice if your employer offers that option. Under this arrangement, you reduce your earnings by a certain amount and the equivalent is paid straight into your pension by your employer. Your employer may also include the National Insurance it has saved.

But be mindful of the limits on pension contributions if you’re focused on a late-stage boosting exercise. You can usually pay in up to 100 per cent of your annual earnings or £40,000 a year to a pension, whichever is lower. It’s slide possible to carry forward unused pension allowances from the previous three years when you fill in your self-assessment form and make additional contributions. But you need to have earnings of at least the total amount you are contributing in the relevant tax year unless your employer is making the contribution. 

Also keep an eye on the lifetime allowance, which is currently £1,073,100. You may have to pay swingeing taxes if your pension pot exceeds that limit, although investment growth can make it very difficult to control in practice.

In this context, it’s a good idea to spread pre-retirement savings across different accounts by using your annual individual savings account (Isa) allowance, which is currently £20,000, as well as your pension. This can reduce the risk of breaching the pensions lifetime allowance and, when you retire, you can draw from an Isa tax-free. “It is the initial tax relief compounded that gives greater returns on pensions over Isas, but the 100 per cent tax-free withdrawals from Isas are very appealing,” says Onslow.

Preparing your pot for retirement

You may need to reallocate your existing pension pot in the years before retirement. Tom Selby, head of retirement policy at investment platform AJ Bell (AJB), suggests that whether you do this or not depends on how you plan to take an income in retirement.

“Someone wanting to turn their entire pot into an annuity should seriously think about moving their funds out of riskier assets [into] bonds and cash as their retirement date approaches," he explains. "We saw in 2020 how volatile stock markets can be over the short term, and the last thing most people want is to have to rethink their retirement plans because markets have tanked.”

If you're taking an income via drawdown there’s less sense in de-risking your retirement funds as you approach retirement because you may need them to provide 30 or even 40 years of retirement income.

“While moving from saving to taking an income might lead to a review of your investment portfolio, perhaps shifting to focus on income-producing investments, for many people there won't be a need to fundamentally change the investment risks they are taking,” explains Selby.

He recommends keeping easily-accessible cash worth 12 to 24 months of your income so that you do not have to draw from your investments when the market tumbles.

Of course, many of us for one reason or another are not in a position to decide precisely when to stop working. But that’s not a reason not to make preparations, according to Onslow. "It’s pretty simple," he says. "Maximise pensions and Isas, and pay off debt until you actually retire. The more money you have saved, the greater the choice you’ll have.”

Cameron points out that it’s still possible to establish some parameters – even if you don’t know when you’ll finally stop working. “Some pension providers offer tools [enabling] you to look at a range of scenarios showing how you'll be financially if you retire at various ages,” he says. “And an adviser can give you personal recommendations and advice.”

So even if you don’t have a specific date in mind for retirement, it’s worth doing the groundwork well in advance. That way, you can establish what your options are and maximise your choices when the time comes.