How can you stop yourself from running out of money in retirement?

When we speak to our clients, there’s one question that comes up more than any other: “Will I run out of money in retirement?”

If this is a concern for you, you’re not alone. Research reported by This is Money found that almost 1 in 2 people are worried that their pension savings won’t be enough to last them through retirement.

This next phase of your life should be your chance to reap the rewards of a lifetime of hard work without worrying.

So, if you’re concerned about your retirement savings, there are several proactive strategies you can adopt to bolster your fund and secure some much-needed peace of mind – continue reading to find out more.

Increasing your pension contributions could bolster your fund

Perhaps one of the more straightforward ways to ensure that you don’t run out of money during retirement is simply by increasing your pension contributions while you’re still working.

By doing so you could bolster your overall fund, meaning you’ll have more savings to draw from during the next phase of your life.

If you have a workplace pension, it can be wise to ensure that you’re maximising your contributions. Even increasing them by a small amount could result in a considerable boost to your fund, research from Standard Life shows.

Imagine you began working full-time with a salary of £25,000, and you made the standard monthly auto-enrolment contributions (3% from you and 5% from the employer) from the age of 22.

By the time you retire at 66, you’d have amassed a total fund of £434,000 (assuming 3.5% salary growth a year, and 5% a year investment growth).

However, if you increased your monthly contributions by 2%, totalling 5% from you and 5% from your employer, you’d accumulate £542,000 by age 66 – a substantial difference of £108,000.

This additional fund could allow you to live a more comfortable lifestyle or sustain your desired standard of living for longer.

One strategy for increasing your pension contributions is to consider paying your “future self” first.

Rather than waiting until the end of the month and saving what you have left, consider setting up enhanced contributions to your pension on payday and then spending the remainder.

This ensures that you consistently boost your pension fund without running out of money in the present and compromising your current lifestyle.

Yet another benefit of increasing your pension contributions is that you could make the most of tax relief. This is applied to each contribution you make, starting at the basic rate of 20%.

It means that a £100 contribution only “costs” you £80. Meanwhile, if you’re a higher- or additional-rate taxpayer, you can claim a further 20% or 25% respectively, through self-assessment.

Additionally, if you do decide to contribute more to your workplace pension, you could ask your employer to match these contributions. Many employers will match a proportion of your savings, bolstering your overall retirement fund and helping you to save enough to support your future.

Creating a detailed retirement budget could give you an idea of how much you’ll need

Creating an in-depth retirement budget can give you a clear indication of how much you’ll likely spend each year to fund your dream lifestyle. This can help you to understand whether you have “enough” for your retirement.

To create a budget, it’s first worth examining your potential expenses, which could include:

Any mortgage or rental costs
Utility bills
Groceries
Travel
Social spending
Long-term care.

Creating a retirement budget can give you a target to save towards, and an incentive to boost your pension contributions now.

Remember that your spending habits will likely change as you progress through retirement. For instance, when you initially stop working, you may spend more on significant purchases, such as dream holidays or long-desired home renovations.

Then, as you start to slow down, you may spend less. However, as you get older and your health deteriorates, you may need to spend more on later-life care.

By factoring in these varying costs alongside your essential expenses, you could manage your expenditure more carefully and avoid depleting your savings too quickly.

Finding ways to mitigate tax on your pension income could help your wealth go further

When the time comes to draw an income from your pension, you may find it challenging to fund the retirement you’ve always dreamed about if you’re losing a sizeable portion of your wealth to tax.

As such, mitigating as much tax on your pension income as possible could help your wealth go further during retirement. There are several ways you can do this.

First, you could utilise your retirement budget to plan your pension withdrawals carefully. By avoiding drawing more from your pension than you need, you could inadvertently avoid paying tax on income that you don’t require at the time.

The amount of tax you pay on pension withdrawals will depend on your personal circumstances and any other sources of income you have.

Pension withdrawals count as income, and you may be liable for Income Tax once you exceed the Personal Allowance, which stands at £12,570 in 2024/25.

If you draw from your pension and this inadvertently pushes you into a higher Income Tax band, you could face a higher tax bill than expected. For example, if you draw a large lump sum this will likely be added to your other income for the tax year, and you could lose 40% or 45% of this to higher- or additional-rate Income Tax.

Alternatively, since your ISA savings are so tax-efficient, you may want to deplete these funds before you access your other sources of pension wealth. This can minimise the amount of your retirement income that is subject to tax.

Working with a financial planner can give you much-needed peace of mind

Drawing your income at an unsustainable rate, both for the tax implications and simply depleting your fund too quickly, could leave you with a shortfall during retirement.

If you’re concerned about the longevity of your pension fund, then a financial planner could add value.

For example, we can use sophisticated cashflow modelling software to consider your current and future levels of wealth, and whether you’re likely to have enough to sustain your desired standard of living in retirement.

Seeing in black and white that you will be able to live the life you want without the risk of running out of money can be a transformative moment, enabling you to make decisions with confidence.

We can also help you create a plan for boosting your contributions or ensuring that you draw an income in a tax-efficient way.

To find out more about how we can help, please contact us at hello@ardentuk.com or call 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.

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.