When visualising your retirement, you need to ask yourself:

This last question is an unknown, but with increased longevity and better medical care, you could realistically expect to look forward to 20 years plus of life in retirement.

Nearly ten years ago, the government introduced ‘pension freedoms’ which are measures designed to give you greater choice over how you pay into and withdraw money from your pension pot. This has made it easier to access your pension fund earlier and in a more flexible way.

You can, for instance, choose to keep your pension pot invested and draw cash from it (drawdown), take a tax-free cash lump sum out of it, purchase an income for life in the form of an annuity, or even withdraw and spend the whole lot.

However, each option comes with its own benefits and drawbacks, and there’s certainly no such thing as a one-size-fits-all solution at retirement. There are also other important considerations like taxation, investment strategy, and the need for cash-flow planning to work out how much to take from a pension to ensure it lasts comfortably throughout retirement. We can help you consider all your options.

Most people will acquire different pensions throughout their working life. It may be possible to consolidate them, but it’s important to take advice first, as you may lose out on valuable benefits or guarantees or incur exit fees.

Whether you choose drawdown or an annuity, you can normally take 25% of your pension pot as a tax-free lump sum. However, if you don’t have immediate plans for the money, it makes little sense to withdraw it from your tax-efficient pension and leave it in a taxable savings account, earning little interest.

Pensions are designed to provide you with an income throughout your retirement. Taking out more money than you need to, or starting withdrawals sooner, will mean you have less to live off in the future or you could even run the risk of running out of money completely. You could also end up paying more to the taxman than you need to.

Ideally you would want to have a debt-free retirement, but ultimately it depends on your individual circumstances and the wider picture. For example, if your interest rates are low, it may be preferable to leave money invested in your pension where it can continue to grow. There are lots of scenarios to consider and it will depend on your individual needs and circumstances. Also, if you pay off your mortgage, will your pension income reduce considerably and leave you property-rich, but cash-poor?

An annuity provides certainty, in that it provides you with an income for life, but it lacks the flexibility that drawdown can provide and once you have opted for an annuity, you can’t change your mind. Choosing how you will take your income in retirement will possibly be the biggest financial decision of your life, so it pays to get advice.

There is a fine balancing act between taking the income you want, to be able to enjoy your first retirement years, but also leaving sufficient for your later years. This is where professional advice is invaluable in helping you to understand what income levels are sustainable.

We can also advise you on the best investment strategy for your attitude to risk and advise you on the merits of taking ‘natural income’ or capital withdrawals.

Over the years, research has produced some interesting findings that highlight the benefit of taking advice when making financial decisions.

When assessing financial value, research has highlighted that people who take specific financial advice were likely, on average to receive between 3% and 4.4% more per annum in net returns. This was through a combination of financial planning, preventing behavioural mistakes, rebalancing portfolios and tax advice.

Elsewhere, another study³ highlighted that receiving professional financial advice over a five-year period (between 2001 and 2006), resulted in a total boost to wealth (in pensions and financial assets) of nearly £48,000 a decade later.

²Russell Investments, 2019, Vanguard, 2022, ³ILC, 2019, Vanguard, 2022

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Warning statement

It is important to take professional advice before making any decision relating to your personal finances. Information is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. No part of this content may be reproduced in any manner without prior permission.