Later Life Financial Planning

The way we retire is changing, with people living, working and staying active for longer, wanting to support future generations and potentially needing care later in life. While the introduction of pension freedoms in 2015 has allowed pension funds to be drawn flexibly, planning your finances has become more complicated.

Funding retirement used to be a fairly straightforward affair. When you got to retirement age, you’d stop working and use your pension pot to buy an annuity that gave you a guaranteed fixed income for the rest of your life, which often wasn’t very long; in 1948 when the basic State Pension was first introduced, life expectancy was 66 for men and 70 for women.

But increasing life expectancy means that nowadays there are several phases to retirement. Pension freedoms have also changed the way people can access and use their pension funds to meet their changing income needs. This month’s article looks at the different options for taking your pension and how you might use them at different stages of your retirement.

Types of Pension

There are three main types of pension: State Pension, workplace pension and personal pension.

The State Pension comes from the Government when you reach State Pension age, which is currently 66 for both men and women but will gradually rise to 67 between 2026 and 2028. At present, the State Pension isn’t means-tested, so your wealth doesn’t impact the amount you receive, but it is affected by your National Insurance record. For those with a full contribution record reaching State Pension age after 6 April 2016 it is at least £179.60 per week1. However, as the State Pension is a benefit funded through taxation there’s no guarantee that it will continue to be paid to everyone at this level, so making your own pension arrangements is crucial.

Your workplace pension is provided by your employer, and will be either a defined benefit or defined contribution scheme. With defined benefit schemes your retirement income is based on your salary and length of service with the employer. These pensions are becoming far less common. Although they are attractive to employees because the benefits are pre-determined, they are riskier and more expensive for employers as the contributions required to fund the agreed benefits can vary considerably.

Defined contribution schemes are now the norm, where the level of contribution is known – the Government has set minimum contribution levels for both employers and employees although both may choose to exceed these – but your actual income in retirement will depend on the amount paid in, the time it is invested, and the investment performance.

Personal pensions are held by you personally. They are always defined contribution schemes, but there is no minimum contribution requirement.  Normally only you contribute, not your employer, although there is nothing to stop them doing so if they wish.

funding different stages of retirement

Employment income doesn’t necessarily just switch off at state retirement age, but it might decrease over time as people continue working but perhaps switch to a less stressful role or fewer hours. Balancing a desire to work less with the need to cover essential bills can be a concern. For instance, many older people will still have a mortgage to pay off; according to UK Finance, the banking trade body, more than 50% of all home loans now go beyond the main borrower’s 65th birthday2.

We’re also more likely to want to stay active at the start of retirement, making the most of our free time with travel and hobbies. And due to changing patterns of wealth, older generations often want to help their children and grandchildren financially if they can.

Taking a tax-free lump sum from your pension can pay off your mortgage, fund a special holiday or home improvements, or mean you can help your grandchildren through university or take their first step on the property ladder. You can normally take up to 25% of your pension pot as a tax-free lump sum, and with the remainder you have the option to either leave it invested, buy an annuity or set up a pension drawdown arrangement – or a combination of all three.

Although they fell out of favour following the introduction of pension freedoms, fixed-term annuities have seen something of a revival recently. An annuity is a type of insurance policy that provides a guaranteed income. Fixed-term annuities last for a set number of years (often five or ten) with a ‘maturity amount’ at the end of the specified period. They can be a useful option for funding retirement, particularly if you still have regular fixed-term payments to make as your working income reduces, and you can leave the rest of your pension invested for later in retirement.

When you stop working completely you may want to move into pension drawdown to fund your lifestyle and one-off extras. Drawdown allows you to leave your pension pot invested and take either ad hoc payments or a regular income. The investment strategy should reflect how much and how often you plan to withdraw funds – it is important to balance the amount you drawdown and the level of risk you take with the remainder of your pot to ensure that your money lasts. By using a range of techniques, including cashflow modelling, we can help you to understand whether what you want to do is sustainable and reaslistic.

Outside of your pension, releasing equity from your home is another way of generating a one-off lump sum or a regular income. Equity release allows homeowners over 55 to tap into the value tied up in their home, and they usually take the form of a lifetime mortgage. Like a regular mortgage, this is a loan on the value of your home, but in this case instead of monthly payments it tends to be repaid on the sale of your home when you die, or if move into long-term care. There is no legal upper age limit, but not all providers lend to all ages – the typical range is 60 to 85.

In the later stages of retirement, annuities may again be useful to fund long-term care. An immediate needs annuity will help pay for the cost of your care in return for a lump-sum payment. This type of annuity is only suitable to those in, or going into, long-term care and provides peace of mind that the costs will be covered (at least partially) for the rest of your life. It can also be very tax efficient, however this is just one way to fund long-term care, and your financial planner can talk you through the best options for your individual circumstances. 

Here to help

There are many things to think about when planning how you will fund your retirement and as your needs change as you grow older. If you would like to discuss any of these themes in more detail, we’d love to help. Please get in touch to discuss your later life plans with one of our expert financial planners.