The move from a life of work into retirement represents a challenge, whoever you are.
No matter your level of wealth, there are decisions to make about when and how to organise your finances to make the most of your savings. Get things wrong and you face paying more tax than you need to, running out of money too soon or failing to maximise the income you’ll need to give you the retirement you want.
Charlie Nicol heads a team within Fidelity whose job it is to advise people to ensure they get their planning right. We sat down with Charlie to discuss the challenge of moving into retirement. This isn’t a personalised plan but simply some of the common themes he sees in the conversations he has with his clients - if you want a plan personalised to you, consider seeking out professional advice.
Here are his expert thoughts on how to retire well.
When should people begin to plan their move into retirement?
“Ideally we would speak to people six months ahead of when they really want to retire”, Charlie says. “Three months might be cutting it fine to get everything in place. Obviously, the earlier you begin to plan, the more time you’ll have to make use of valuable tax allowances for pensions and ISAs that will ultimately give you more options in retirement.
“It can make sense to time it around the end of the financial year because it can make the planning a little neater. That’s when the important tax allowances begin. But it doesn’t really matter when.
Where do you start when it comes to building a plan?
“People usually have three needs they must think about. An income need, a lump sum need and the need to pass on money after they die. Once we’ve established these, we can build a plan.
“Tax efficiency drives a lot of the work we do. For income, it makes sense to maximise tax-free allowances so that as much of your income as possible comes without tax. Our aim is to cover all your essential expenditure with tax-free income.
“For example, you can use the Personal Allowance for income tax which means £12,570 can be earned before you pay any income tax. If you take withdrawals from a pension, you might be able to take more than that because 25% of lump sum withdrawals are also normally tax-free. If a client has ISAs, then it can make sense to take some income from there because there’s no tax on withdrawals. If there’s money held outside of ISAs, then there is an allowance for Capital Gains (currently £3,000) which is also available tax-free.
“Ideally you will be able to use a combination of all these things to maximise tax-free income, but in a way that keeps the plan sustainable. You might not want to take all your tax-free cash in the early years of retirement, for example, if it leaves nothing left for the future or brings additional funds into your estate un-necessarily from an inheritance tax point of view. Our retirement planning calculators can also help you to look more closely at various aspects of your retirement, from planning your goals and your savings to working out your withdrawals.”
How do you begin to gather the information you need to build a retirement plan?
“We’ll start with a conversation where we ask lots of open questions. What’s your history? What’s your occupation, your income, debts and existing savings? We find out about their priorities - do they have dependents? Do they want to make gifts or pass money on after death? Do they want to travel in the future or get a new car every few years?
“Anything, really, that needs to be reflected in their retirement plans.”
Pension rules can change - how do you stop retirement plans getting out-of-date?
“The changes to Lifetime Allowance and Annual Allowance in last year’s Budget (April 2023) were really significant. And this year we’ve had reductions to the tax-free allowance for Capital Gains and the replacement of the Lifetime allowance with a new regime for the taxation of lump sums and lump sum death benefits. Things like these have meant that we have had to review the plans we recommend.”
“It’s why it can be so important to get advice not only at the point of retirement but on an ongoing basis. That way your plan stays flexible and changes over time to stay on course.”
What are the important considerations that perhaps people may have missed?
“Life expectancy is a big one. People who are healthy at retirement should expect to live for another 30 years or more and their financial plan needs to take account of that. Inflation is also important because over long periods it will really impact the value of their money.
“We also need to explain the risk of withdrawing too much, too soon. When you’re accumulating your savings it’s pretty straightforward - just save as much as you can. But when you’re withdrawing you need to consider the impact of investments falling in value. You’ll need to have cash on hand to meet your income needs, ideally without having to sell investments to get it. Normally we’ll look to build in a cash pot of around 6-12 months of income.”
What about planning to pass money on?
“Inheritance tax (IHT) is a big consideration for lots of people. If they plan to leave money for loved ones, maintaining the value of pensions makes sense because it falls outside of your estate for IHT purposes.
“We had a client recently who wanted to pass money to her daughter in the future, but their earnings meant they were likely to face a big IHT bill at that point. We were able to suggest using Junior ISAs and even a Junior SIPP (Self-Invested Personal Pension) to greatly reduce the likely tax bill in the future. That kind of planning isn’t always obvious but it can make a huge difference to outcomes over long periods.”
How does the State Pension fit in to the plans you draw up?
The State Pension is really important in covering essential spending because it is guaranteed and enjoys some protection from inflation. Many of the people we speak to, though, are still a few years from getting theirs so we need to work out a plan to bridge the gap.
“We’ll sometimes suggest Fixed-term Annuities to generate a guaranteed income until the State Pension kicks-in. The advantage of that is it’s time limited, so you reduce the risk of annuitising too much of your liquid assets. It’s this kind of solution that people aren’t likely to know about but it can really add value to your plan.
What are the common mistakes you see in people’s retirement plans?
“People are often too eager to take tax-free cash, which usually becomes available from 55 at the moment (rising to 57 after April 2028). They’ll want to get their hands on it as soon as they can but then have no real plan of what to do with it. Often they’ll just want to put it into savings or investments outside a pension.
“But doing that means it’s potentially subject to IHT, and any interest or investment gains may not be tax-free.”
How can you demonstrate the value of the advice you give to those retiring?
“There’s a cost to professional advice but the value you get from it is about more than just money. The people who come to us want to know that they are making the most of their savings. That said, our modelling usually means that we can show the advice we give pays for itself.”
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 011 3797.
Fidelity’s Retirement Service also has a team of specialists available on 0800 368 6891 who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
