Saving into a pension and accessing it comes with a lot of challenges as you need to think about how much income you need throughout retirement.

Research from the People’s Pension suggests that looking at the bigger picture is something many people are putting off, even as they near retirement age and start drawing an income. It’s an outlook that could mean they face financial insecurity later in life or even risk running out of money in retirement.

Pension Freedoms: Understanding income throughout retirement is even more important

In 2015, Pension Freedoms were introduced. This gave retirees far more flexibility and freedom over their income in retirement. However, the greater choice has come with more responsibility and extra complexities.

Those retiring in the last five years and the coming years are likely to enjoy a lifestyle that is very different from their parents. Part of this is because of the flexibility in how you can access your pension.

Previous generations would have given up work on a set date, often purchasing an annuity with their pension savings to generate an income that would be guaranteed for the rest of their life, creating income security throughout retirement. Today, retirees may choose a phased approach to retirement, meaning they need to access a portion of their pension while still earning an income. Or they may choose to flexibly access their pension to suit changing income needs through flexi-access drawdown over an annuity.

These increased options allow retirees to match their income with their lifestyle goals. But it also means more decisions need to be made, including how much income to take and considering how this relates to financial security later in life.

Just half of those nearing retirement have seriously considered how they’ll manage financially

The People’s Pension research asked those over 55: ‘Have you thought about how you are going to manage financially when you retire?’

Worryingly, just 51% said they’d given it some serious thought. In contrast, 36% said they’d thought about it a little and 13% had not considered it at all. Even more concerning is that a third of the people who hadn’t thought about it or had only given it a little thought, had already accessed their pension in some way. This could mean they’ve made a financial decision that will affect the rest of their life without fully thinking it through.

Overall, the research found that it’s rare to find someone who has made a detailed calculation of their future living expenses. Most people, even those with less than six months until their expected retirement date, preferred a ‘wait and see’ approach. Understanding how much your lifestyle will cost, and how it will change in later years, is essential for ensuring you have enough to last throughout retirement.

Instead, the responses found those nearing retirement were focused on assembling pension information and the ‘fun stuff,’ like thinking about how they’ll spend their time. Both of these are important steps for helping you get the most out of retirement, but they also need to be part of a wider plan.

One example of this is the 25% tax-free lump sum you can take from your pension from the age of 55, rising to 57 in 2028. For most of those questioned, this was viewed as a ‘no brainer’. However, taking a lump sum out of your pension at the very start could mean you run out of money later in life.

If you knew taking out a lump sum at 55 meant you wouldn’t be able to maintain your lifestyle in your later years, would you still do it?

Understanding the impact of your decisions and thinking about these kinds of questions can help you fully prepare for retirement and allow you to enjoy it, safe in the knowledge that you can manage financially.

Balancing retirement aspirations with security

The good news is that most clients find they’re able to balance their retirement goals with long-term security through effective financial planning.

Planning your retirement before you access your pension means you can balance enjoying the retirement lifestyle you’ve been looking forward to with goals you may have for later in life, such as providing a financial helping hand to loved ones, or ensuring you have enough for the unexpected, like potentially paying for care.

If you’ve yet to consider how you’ll manage financially or would like to review your plans with a financial planner, please get in touch. Our goal is to help you get the most out of retirement while ensuring your finances are secure for the rest of your life. With big decisions to make, financial planning at the point of retirement can set you on the right track.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

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.