During your working life, you will likely pay into pensions and other savings to build a pot for retirement. Then, when you finish work and access those savings, you can start funding your desired lifestyle and achieving your goals.
Of course, it’s important that you don’t spend your pot too quickly or you might face a shortfall later in life, and this is a problem that many people face currently as the cost of living rises.
Indeed, according to FTAdviser, 20% of Brits over the age of 55 said they’d consistently spent more than expected during their retirement.
If you don’t manage your spending carefully, you may have to make sacrifices to your lifestyle later because you depleted your savings too quickly.
Fortunately, you could avoid this if you follow these five golden rules for managing your money in retirement.
1. Create a retirement budget
Budgeting is one of the most effective ways to manage your spending in retirement. By listing all your expenses, you can determine how much it will cost to maintain your desired lifestyle.
Your budget should cover expenses including:
- Mortgage or rent costs
- Utility bills
- Groceries
- Eating out and socialising
- Travel, including the cost of running a car
- Supporting family members.
Once you have a budget in place, you can see how long you’re able to fund your lifestyle. If necessary, you can also adjust your spending so your retirement pot lasts longer.
Additionally, you can avoid drawing more than you need from your pensions, meaning you could potentially reduce the tax you pay. Limiting the income you take from your pensions also allows you to leave your wealth invested and potentially generate more growth.
2. Don’t forget to consider inflation
When planning how you will spend your retirement pot, it’s important to consider the effects of inflation. This is because your living costs are likely to rise over time, and you may need to factor this in when making a budget and drawing an income from your pensions and other savings.
For example, imagine your expenses were £20,000 last year. If inflation is 5%, the same goods and services would now cost you £21,000.
This means you may have to increase the amount you draw from your retirement pot if you want to maintain your standard of living. Consequently, you could deplete your savings faster, and it’s important to account for this.
As life expectancies increase, your retirement could last 30 to 40 years or more so it’s more important than ever to consider rising prices.
We can help you here by using cashflow planning to model how inflation might affect your budget. This may allow you to plan for rising living costs more effectively, so you don’t face a shortfall later in life.
3. Build an emergency fund
The wealth that you save in your pension is invested and may grow over time. When you retire and draw from your pension, your provider sells investments to generate an income for you.
If the value of your investments falls, this means you must sell more units than you previously did to maintain the same level of income. As a result, you could deplete your savings much faster during a period of market volatility.
That’s why you may want to save a significant emergency fund outside of your pensions. You could use this wealth to pay your living expenses until your investments recover again. This could mean that you don’t spend your pension savings as quickly during a market downturn.
It is recommended that you save between one and three years’ worth of expenses in an emergency fund but you may want to keep more if it makes you feel more secure.
Additionally, having a healthy emergency fund allows you to absorb unexpected costs such as home repairs without disrupting your budget or relying on expensive borrowing.
4. Take steps to mitigate the tax you pay
You could pay several different taxes when accessing wealth from your pensions, investments, and savings.
For instance, you can typically take the first 25% of your pension as a tax-free lump sum. You will then pay Income Tax on any further withdrawals that exceed your Personal Allowance (£12,570 in 2024/25).
You might also pay Income Tax on cash savings interest you generate from wealth outside an ISA. Any non-ISA investments could attract Dividend Tax, and you may face Capital Gains Tax (CGT) when accessing the value in them too.
Unfortunately, you may be more likely to pay tax in retirement in the future as Income Tax thresholds remain frozen. You can find out more about this in our useful article explaining three ways to reduce your Income Tax bill in retirement.
If you pay more tax than you need to, your retirement pot may not last as long as you initially thought it would. Fortunately, we can help you find ways to potentially mitigate a large bill.
5. Prepare for care costs later in life
Whether you fall ill in later life or simply become less independent as you get older, you may require care, either in your own home or a residential facility. It’s important that you prepare for this eventuality ahead of time so you can afford to pay for care.
This is because you only receive financial support from the local authority once your total assets – including your home – fall below the “upper capital limit” (UCL) of £23,250.
As such, you could spend your savings and even be forced to sell your home to pay for care. This means you won’t have much wealth left to leave behind for your loved ones.
You may be able to avoid this situation by building additional wealth to pay for care, should you need it. By setting these funds aside, you can ensure that you’re able to afford care without relying on the wealth you need for general spending.
Ultimately, this means that care costs don’t affect your ability to fund your dream lifestyle in retirement. And if you don’t require care, you have more wealth to pass to your loved ones when you’re gone.
Get in touch
If you’re preparing for the transition to retirement, we can help you explore the most suitable ways to fund your lifestyle.
Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article 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 cashflow planning or 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.
