Who doesn’t like to convert their retirement to a true life of leisure without bothering about outliving their savings? The aim is to retire from work, not from life. You will be respected if you cultivate a mindset that allows you to live independently during retirement without carrying any baggage.
Careful early financial planning is the key to making this dream a reality.
- Relying solely on a fixed pension can be problematic, as its purchasing power tends to erode over time. Retirees are encouraged to have workplace pension savings or any other income sources to supplement the State Pension.
- Don’t put your retirement plans on hold to fund your children’s education. Whether it’s private schooling or university fees, prioritising their future at the cost of your own retirement security can backfire. Your financial independence should come first.
- Ignoring private health insurance. NHS healthcare is free but can have long waits. Getting private health insurance by around age 45 is recommended, as premiums rise with age. So, get coverage early and treat premiums like “monthly payments” or “direct debits” to build an extra layer of protection.
- While moving to the countryside or a quieter area might seem appealing in retirement, be cautious. Remote locations can limit access to healthcare, public transport, and emergency services.
- Not having at least 30% of equity in your portfolio. Some portion of your retirement provision must have an equity component, as you cannot depend only on fixed income. Inflation can cause a shortfall in your cash flows.
- Avoid disclosing all your financial details to your adult children. It’s best if your spouse has primary access and control over your finances and Will, to reduce potential complications later.
- Make your financial plan simple so your spouse or partner can manage things easily in your absence. They should know where important documents are kept and who to contact for support.
- Spending all your retirement income can make you suffer badly. Save at least 30% of your retirement savings.
Understanding the power of the Pension
Understand the power of your pension. Whether it’s a defined contribution scheme, a defined benefit scheme, or a personal pension, knowing how your pension grows, when you can access it, and what tax implications apply is essential for confident retirement planning.
Think positively about life after work. Be fortunate enough to retire early and lead a life of comfort that you deserve.
In the process of building your retirement savings, consider two powerful tools: workplace pensions and tax-efficient savings like a Lifetime ISA.
What is a Pension?
A pension is a pot of money which comes in every month as a regular income once you retire. The money put into it is usually locked until you reach retirement age.
Although most people have different perspectives towards pensions, the reason why pensions are so powerful is because of the generous tax relief you receive on contributions.
There are three main types of Pensions:
- State Pension (paid by the government based on your National Insurance contributions).
- Workplace pensions (set up by employers).
- Personal pensions (you arrange yourself).
Both pensions and ISAs are valuable tools for retirement savings, but they differ in tax treatment.
With a pension, you get special tax-free benefits when you pay in. From age 55 (rising to 57 in 2028), you can usually withdraw up to 25% of your pension pot tax-free, subject to a lifetime limit known as the Lump Sum Allowance (LSA), currently set at £268,275. Any amount withdrawn beyond this limit is subject to tax.
ISAs don’t offer tax relief on contributions, but any interest, dividends, or capital gains earned within the account are tax-free. You can also withdraw money at any time, tax-free, providing greater flexibility.
Types of ISAs:
- Cash ISA: Works like a regular savings account, but you don’t pay any tax on the interest earned.
- Stocks and Shares ISA: Let you invest in the stock market, funds, or shares, and any profits you make are tax-free.
- Lifetime ISA (LISA): A government-backed account designed to help individuals save either for their first home or for retirement. You can contribute up to £4,000 per year and receive a 25% government bonus.
A helpful tip: Starting to save for your pension early is a wise move. However, delaying pension withdrawals carries some risks, such as changes in tax rules or poor investment performance, so it’s important to review your options regularly. This allows your pension pot to grow and gives flexibility.
Just remember that waiting has some risks, like market volatility or changes in interest rates. So, it is important to assess personal circumstances and lean on expert advice to decide the best timing for pension conversion.
Your pension should typically form the foundation of your retirement income, thanks to tax relief and employer contributions. ISAs can complement this by offering flexibility and tax-free withdrawals. You can use an ISA as a backup pot for emergencies, for flexibility, and tax-free growth.
Together, starting early with both pensions and ISAs builds a balanced, tax-efficient retirement fund for a more comfortable future.
Final thought: You are not alone on this journey
Nobody starts with complete knowledge – whether you are a disciplined investor, a do-it-yourself investor, or someone just starting and has not done anything on their own. Having an external guide to handhold you, as a push back, can take you to the route of success without making you feel like a fish out of water.
Time is slipping away, and focusing too much on the financial side alone might cause delays in certain important actions. Working with a skilled Financial Planner can show you another view, of following the process, not just from a return angle, but takes away a lot of load from you by refining the plans and simplifying your journey.
Nothing saved for retirement yet? Unsure where to begin or how much you should be saving? Our financial advisors are here to help you create a clear, practical plan—so you can face retirement feeling confident and secure.
