The journey to retirement can seem like a long road. After all, you’ve likely been contributing to pensions and other savings for decades during your working life, so you can build a healthy retirement pot to draw from.
For most of your career, you may have been focusing on accumulating as much wealth as possible so you can meet your retirement savings goals.
Yet, as you approach your retirement date, you may begin thinking about how you will draw from your savings to fund your dream lifestyle.
This stage of retirement planning, known as “decumulation”, could present several significant challenges if you enter this chapter unprepared.
20% of Brits over 55 consistently spend more than they had planned to in retirement
When you begin accessing your pensions and other savings, it’s important that you don’t spend your retirement pot too quickly. If you overspend early in your retirement, you might have to make sacrifices to your lifestyle later should your savings run out.
This could be more likely than you think as Pension Bee reports that 20% of Brits over the age of 55 said they have consistently spent more than they expected to during retirement.
Fortunately, you may find it easier to manage your spending if you create a detailed retirement budget. This might include your spending on:
- Mortgage or rent costs
- Utility bills
- Groceries
- Travel expenses, including the cost of running a car
- Eating out and socialising
- Financially supporting family members.
By tracking your expenses in this way, you can determine precisely what level of income you need to draw from your savings each year to fund your lifestyle. If you only draw this amount, you may be less likely to overspend.
Additionally, decumulating according to your budget could leave more of your wealth invested in your pension for longer, meaning your pot potentially achieves more growth in the future.
Inflation may erode the spending power of your savings over time
When calculating how much you need to draw from your retirement savings each year, you may need to consider how inflation could affect the cost of living in the future.
For example, you might spend £50,000 a year on your general expenses at the beginning of your retirement.
However, according to Statista, inflation is forecast to average:
- 6% in 2025
- 3% in 2026
- 1% in 2027.
If these forecasts are correct, this could mean that prices increase by a total of 7% over the next three years.
As a result, you could need £53,500 to maintain your current lifestyle in three years’ time because the cost of goods and services are likely to have increased.
To afford this, you may need to increase the amount that you draw from your savings over time, so you can still achieve your desired lifestyle, despite the effects of inflation. It’s important to consider this so you can more accurately forecast how long your savings are likely to last in retirement.
We can use cashflow planning to model your spending in the future, taking inflation into account.
You may also want to review how you hold your remaining wealth to ensure that you’re achieving growth that keeps pace with inflation. We can advise on how to achieve this.
The number of people over State Pension Age paying Income Tax rose to 8.51 million in 2024/25
You could pay tax when generating an income from your personal pensions and the State Pension. If you don’t consider the tax implications of accessing your retirement pot while receiving the State Pension, you could pay more than you need to.
Normally, you can take the first 25% of your personal pensions as a tax-free commencement lump sum. Any further pension income that exceeds your Personal Allowance of £12,570 in 2024/25 will be taxed at your marginal rate of Income Tax. This includes income from your State Pension.
In 2025/26, the full new State Pension payment will rise to £12,016.75 a year. As such, if you receive the full amount, this income will use up most of your Personal Allowance, before you have even begun to draw an income from your personal pensions and other savings.
Additionally, the full new State Pension payment increases each year because of the triple lock guarantee. The amount of income you need to fund your lifestyle may also rise due to inflation.
Meanwhile, the Personal Allowance has been frozen since 2021 and the chancellor confirmed in her recent Budget that it would remain at its current level until 2028.
Consequently, you could draw a higher income and be more likely to exceed the Personal Allowance, meaning you pay more Income Tax in the future.
Indeed, PensionsAge reports that the number of people over State Pension Age paying Income Tax rose to 8.5 million in 2024/25 – an increase of 660,000 on the previous year.
Fortunately, you may be able to reduce the Income Tax you pay in retirement in several ways. Your budget is useful here as it ensures you only draw what you need from your pensions and leave the rest of your wealth invested for as long as possible.
You might also benefit from supplementing your income with savings from tax-efficient sources, such as ISAs.
We can discuss the most tax-efficient ways to draw from your retirement savings so you can potentially mitigate a large bill.
Get in touch
If you’re planning to retire soon, we can help you navigate the decumulation phase with confidence.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.