Many more people today find it difficult to answer the apparently straightforward question: “What do you want from your retirement?”
In “the old days”, most would-be retirees had a plan that involved picking a retirement age — or having it picked for them by their employer — and then buying an annuity with all the pension savings they had accumulated up to that point.
The pension freedoms changed all that. The decline of the availability of defined benefit schemes in favour of less-generous defined contribution pensions also had a big impact. In addition, longevity changes contributed to a rethink as typical life expectancy increased, for men at least, by more than five years for a 65-year-old in 1980, when compared with a 65-year-old in 2020.
So, the average life expectancy for men aged 65 in 2020 was 83.5 years (up from 78.4 years in 1980), and for women it was 86 years (up from 81.8 years). Furthermore, the pandemic years appear to have precipitated earlier retirement for some as average retirement ages fell marginally for both men and women between 2020 and 2021, according to data from the Office for National Statistics.
Contribution holidays
These changes opened up the “opportunity” for greater disruption in retirement saving habits, with many individuals taking pension contribution holidays, for example.
They also raised the spectre of more of us under-saving for retirement, given the fact that most will be of retirement age or older — as defined by the state pension age or above — for longer than in the past. Hence the baby boomer generation retirees today will need to have saved more than the previous generation.
However, it is not just about persuading would-be retirees to boost their contributions on the run-up to retirement, but also working out how and when to decumulate and how to make those contributions stretch further.
Here, we look at some of the options for individuals facing retirement:
Tax-free cash lump sum
For many, having tax-free cash is a great way of kicking off retirement in style. Taking a quarter of an entire pension pot tax-free upfront might comfortably pay for that new car, the world cruise, or a longed-for home extension. It seems a good way to mark such a momentous life event as retirement.
However, would it be better served by taking the TFC in increments as part of a drip feed income drawdown plan? Independent financial advisers increasingly use online tools built into their advice platforms to assess the likelihood of running out of money in differing decumulation scenarios, and could use this intelligence to advise on decumulating a slice of TFC as part of regular withdrawals from a client’s income drawdown plan. It certainly looks more tax-efficient.
Does the individual need to support their partner in retirement?: If the partner has independent retirement income sources, then there may be no need to consider their income needs during their retirement years together. It might be sensible for advisers to consider both saving pots and retirement plans to work out if there are any income gaps emerging.
