How to pay less tax on your retirement income
For most people there’s no escaping tax in retirement. But with advice and planning, it’s possible to reduce its impact on your retirement income.
Retirement planning
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Knowing how much money you will need in retirement is one of life’s million dollar questions and will depend on a wide range of factors, not least the lifestyle you aspire to have. In this article we explore some of the ways you can gain greater clarity on your future income requirements.
Retirement used to be reassuringly predictable. On your 60th or 65th birthday you switched overnight from full-time employment, to having time on your hands. At the same time, your pension was transformed into a guaranteed income for life, to fund your retirement. Today, everything is different. Not only are we living longer, healthier and more active lives, most of us can now decide when, how, and even if, we retire.
With the introduction of pension freedoms, there is no longer the onus on us to cash in our pensions at set ages, and instead we can take our pension money flexibly. But, with this freedom also comes responsibility, and for some, uncertainty. Many of us have no clear plan for what we want from our retirement, and even more of us underestimate how much money we will actually need for it when we do.
How long will your money need to last?
Given our increasing lifespans and the fact many of us are leading more active and healthier lives, most experts suggest that we should plan to make our retirement money last at least 30 years.
A key consideration is that we typically underestimate how long we will live. According to the Office for National Statistics, a 55-year-old woman has an average life expectancy of 87 years, while the average for a 55-year-old man is 841. But averages don’t tell the whole story. Our 55-year-old man has a one in four chance of reaching 92, while our 55-year-old woman has a one in four chance of reaching 94 and one in ten chance of celebrating their century. In other words, if you’re in good health, you could spend at least up to four decades in retirement, so you need to know how this would impact your retirement pot.
It’s easy to underestimate your retirement needs
Even people with larger retirement pots struggle to estimate how much retirement actually costs. According to the 2023 Wealth Index published by Saltus, high-net-worth individuals (with £250k+ investable assets) said they expected a pension pot of £578k would achieve an individual income of £55k in retirement. In fact, an annual retirement income of £55k requires a pension pot of more than £1.3m2, almost double the average estimate. The impact of inflation is also a major factor. To put its potential impact into context if someone today needed £100,000 to meet their current standard of living, in 15 years’ time they would need £180,000 based on the long-term average rise in the cost of living of around 4%.3
How far will your money go?
As a benchmark, The Pensions and Lifetime Savings Association has published a set of ‘retirement living standards’ which suggests a couple will need £54,500 a year for a comfortable lifestyle in retirement4, allowing them three weeks of the year holidaying in Europe and £300 a month for dining out. These guidelines assume you will have paid off your mortgage and that you will need combined savings and investments of well over £1m to afford a comfortable lifestyle.
Predicting the future - the benefits of cashflow forecasting
Can you afford regular trips abroad? Will you need to sell your holiday home? Can you support the kids and not have to cut back on your own lifestyle? Whatever your goals our financial planners can model your likely living expenses and income and run through a range of scenarios to see what happens when your choices, needs or circumstances change. Cashflow modelling makes a number of assumptions based on spending, potential income and factors like inflation, any of which could change over time. It’s not a guarantee of how things will pan out, but it will give you a good sense of the lifestyle you can achieve and can also help provide clarity on the most tax-efficient way for you to take an income in retirement, and whether you’re likely to leave an inheritance tax liability. We would then suggest this is reviewed at least annually to make sure you stay on track.
Planning how to take an income in retirement
If you’ve had more than a passing interest in your finances over the years, your pension is probably where most people think retirement income starts. But, if we want to maximise the efficiency of our income and enjoy as comfortable a retirement as possible, it’s not necessarily the first place we should turn to. Instead, we should be thinking of all our savings and investments collectively and getting advice on the most effective income strategy. Because, with the right planning your retirement income may potentially stretch further. For more information on this topic please read our article How to pay less tax on your retirement income.
Let our experts help you plan the retirement you deserve
In retirement, as in comedy, timing is everything. Financially and emotionally, choosing the right moment to retire can make all the difference to enjoying your retirement years. Whatever retirement means to you and whenever you plan to retire, planning ahead will help bring financial clarity to the lifestyle changes you want to make and the ambitions you have for your future. Our team of financial planners can review your current savings, model your likely expenditure and let you know if you are on track to enjoy the retirement you aspire to.
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1 Source: ONS
2 Source: Saltus.co.uk
3 Source: UK Retail Price Index from 1915-2020 (4.03%)
4 Source: https://www.retirementlivingstandards.org.uk/
Important information
The contents of this publication do not constitute a personal recommendation or advice and the products and/or services referred to may not be suitable for all investors. It is important to consult a professional adviser before taking any action or making any decisions.
The value of investments and the income derived from them can go down as well as up and you could get back less than you originally invested. Your capital is at risk.
Tax treatment is dependent on individual circumstances. This information is provided in good faith and is based upon our understanding of current tax law and HMRC practice, which may be subject to change in the future.
Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.