A guide to planning your retirement

Whether your retirement seems a long way off, or just around the corner, it’s never too early – or too late – to make plans.

You want to be as comfortable as possible after all your years of hard work, so that you can relax and enjoy your lifestyle.

Our friendly team of expert financial advisers at PIL Southampton has many years of experience helping hundreds of people to plan their retirement. 

In this article, we cover all the key points you need to consider, and give you lots of helpful tips and advice.

How much income might you need in retirement?

Of course, your answer will depend on how much money you’d like to spend! Some may want to be able to afford an annual round the world cruise, others may be happy staying close to home and pottering in the garden.

Whatever lifestyle you prefer, everyone’s spending can be split into two categories – the essential bills that cover your day-to-day needs, and the discretionary items that you have a choice about.

You may also need to consider how you’re going to service any debts that you’ll still have after retirement. 

How can you work out your likely retirement income?

In most cases, the majority of your retirement income is likely to come from your pension pots. This will be both your State Pension – more on that later – and any private pension/s you have taken out yourself, or that an employer has contributed to on your behalf.

Your pension providers should be sending you annual statements showing you how much is in each of your pension pots, and you can ask them for information about your retirement options.

It can be difficult to keep track of pensions that have been set up for you through employers in the past, or even ones you may have set up yourself but lost the paperwork for. The government has helpfully set up a Pension Tracing Service website to help people track down their lost pensions.

Pensions aren’t the only source of retirement income though. You may have a range of savings and investments you have built up, or you may have a buy-to-let property that you are planning to use the rental payments from to supplement your retirement income.

Alternatively, you may choose to take a part-time job after you retire.

You might downsize your property to release a lump sum, or rent a room to a lodger. Some retirees choose to stay in their home but sell some of their equity in return for a lump sum or regular income.

Assessing your income options

Defined benefit pensions usually pay you a guaranteed income from the retirement age that’s detailed in that particular scheme. Most commonly, this will be age 60 or 65. How much you’ll receive will depend on your salary and how long you worked for that company.

Some pension schemes may also pay you a lump sum, or you might have the choice of sacrificing some of your ongoing income in order to take out a lump sum.

Defined contribution pensions are pots of money that you can start taking from when you reach the age of 55, though the longer you leave the pension pot before you start withdrawing from it the higher the pension pot value could get (this is not, however, guaranteed, as investments can go down as well as up). Note that, from 2028, the minimum age you can withdraw money from is going up from 55 to 57.

State Pension

How does the State Pension work? 

The State Pension is a regular, weekly payment that you can claim from the government as soon as you reach State Pension age, until you die. The amount you receive depends on your National Insurance record.

The amount of State Pension you receive in the UK increases every year in line with rises in the cost of living. 

What age do I need to be to receive my State Pension? 

You can start claiming your State Pension as soon as you reach your State Pension age, even if you are still working. Currently, for those in their 40s to mid-60s, it’s going to be between 66 and 68, depending on when you were born.

However, the State Pension age is being regularly reviewed, as it is linked to life expectancy, and eligibility dates could change.

State Pension Rates 

The current full State Pension for an individual is £221.20 per week (2024/2025 tax year). However, you only receive the full new State Pension if you have paid all due National Insurance contributions, which is 35 years of paying National Insurance or applying National Insurance credits. 

Examples of credits would be if you had been claiming state benefits because you were ill or unemployed, or if you were claiming Child Benefit for a child under 12 years of age.

You receive a sliding scale proportion of the new State Pension if you have between 10 and 35 qualifying years on your National Insurance Record. 

You can check your National Insurance Record here, to find out if you are predicted to have a shortfall by the time you retire. If you do have a shortfall, it may be worth paying HMRC to top up your Record in order to benefit from receiving the full State Pension.

Note: these guidelines apply to anyone reaching State Pension age after 6 April 2016. Those who reached State Pension age before then receive the full basic State Pension, which is currently £169.50 per week (2024/2025 tax year).

Check your position and make a retirement plan 

When you have worked out how much income you are likely to need to fund your lifestyle in retirement, how much income you are predicted to receive when you retire and when you might start receiving those funds, you can start to make plans for your retirement.

If it looks like there is going be a gap between your retirement income and your expected expenditure in retirement, you may need to consider changing your plans, i.e. working for longer, or saving more money before you retire, adding to your pension pot, or maybe taking some money from one of your pensions earlier than planned.

And keep in mind that you don’t know how long you’ll need to rely on your retirement funds, so it may not be wise to spend a high proportion of any lump sum too soon.

If you are relatively young when you are reading this article, our advice to you is that the earlier you start contributing to your pension the more financially comfortable you are likely to be when your retirement comes.

When do you want to retire? 

Consider if you want to fully retire at a particular time, or if you want to wind down gradually and reduce your hours over a period of time.

You can take your pension before you stop working, once you’re past the minimum age which is usually 55. If you’re in poor health, you may be able to start drawing your pension down earlier.

Defined contribution pensions often give a lot of flexibility about when you can start withdrawing from them, but you’ll need to check with your pension provider as each will have their own terms and conditions. Also check if your plans will incur extra charges.

Defined benefit pension schemes normally set out the retirement date you’ll be able to start taking your pension from.

As a rule of thumb, if you take out your pension earlier you are likely to have a reduced income as the provider could need to pay you for longer.

Will you still have debt to manage after you retire?

Ideally, you will have cleared any debts before you retire. If you are in a position to pay off your debts, start with the one that has the highest interest rate. 

If you are considering using a lump sum from a pension to clear your debts, first speak to a qualified adviser, like one of our team at PIL Southampton, to make sure you are choosing the best solution for you.

Estimate how much tax you might have to pay 

After you retire, you’ll still have to pay Income Tax on any income you receive that’s above your Personal Allowance. Income includes all your pension income, include your State Pension.

You don’t, however, have to pay National Insurance contributions on any income you earn after you’ve reached your State Pension age.

The Personal Allowance is currently £12,570 for the 2024/2025 tax year, but may be lower if you’re a high earner and your adjusted net income is over £100,000.

If you are married or in a civil partnership, one partner can transfer up to £1,260 of their Personal Allowance to the other.

If you take lump sums from your pension pot, your provider will have already taken the tax off, calculated using your tax code.

Sometimes, you might have to pay emergency tax when you take money from your pension pot, but you’ll be able to claim that back from HMRC.

Because you have to pay tax on all your income, make sure HMRC knows about all your income sources so that you’re paying the right amount of tax against each income. It might be that you can spread your Personal Allowance across your different sources of income.

Self-employed retirees, and individuals who are retired but whose total income is above £100,000, will have to complete an annual Self-Assessment tax return.

Next steps

Our experienced, qualified and expert team of financial advisers are here to help you plan for your retirement.

They will get to know you, your needs and your personal circumstances so that they can help to find the best solutions for you.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.