You might be closer to achieving your pension plan than you think

When it comes time to hang up the boots, it’s common to face anxiety about our savings being enough for the retirement we imagined.  

Preparing for retirement, we often think about how much we plan to spend, whether that’s continuing a similar lifestyle to your current one or abandoning the UK winters for sea-side sun. Depending on the plans, this goal can feel out of reach. 

While it is important to start pension contributions early on to create a comfortable retirement, it’s also important to recognise the boosts that could help you once you retire.  

Using your pension pot

One of the most important factors to consider is how you plan to use your pension fund in retirement. Remember, just because you hit retirement age, doesn’t mean your money has to stop growing. In fact, if you begin with a significant pot, and don’t make big withdrawals right away, you can keep your pension pot growing well into retirement.

Let’s see how this works: Susan retires with a pension pot worth £500,000 at age 60. She plans to withdraw £2,500 a month, part of which will go to paying income tax and the rest of which will be available for her to spend. She’ll spread her tax-free cash out over the withdrawals. The money in her pension pot stays invested, and it returns an average 5% per year after fees.

In the first year, Susan will have withdrawn £30,000 gross. But, she would have made over £24,884 in returns on her pension pot. So, her pot would only be down to £494,884 at the end of the year. If she continued like this, 30 years later, when Susan was 90, she’d still have a pot worth over £150,000. Not to mention, with her state pension starting at age 67, Susan would receive another boost to her income that would allow for even less pressure on her pot.  

It is important to keep in mind that inflation will also likely continue to rise during retirement, so costs may increase over the years, depending on lifestyle.

Here’s how much you would have after 30 years with a variety of different starting pots and level monthly expenditures.  

The perks of getting older

There are some nice benefits that come along with getting older, and they go beyond being able to impart wisdom to your family members. It’s something that we all love to get: free stuff!  

Once you reach age 60, many transport networks offer free services. In London, this can start at 60 if you have an Oyster photocard, and in Manchester, it can begin at 60 when travelling at off-peak times. Make sure to check the rules in your local area, as there may be specific rules or passes you need to obtain to get the benefits. In England, you can claim a free older person’s bus pass at state pension age, currently 66. In Wales, Northern Ireland and Scotland, this comes into effect at age 60.

Over the age of 60, you can also receive complimentary health services. This includes free prescriptions from NHS, hearing tests, and eye tests. Depending on the benefits you receive you may also get free dental care. You can see a list of qualifying situations.  

Gym goers can also find extra savings. Many gyms, including Better Health and Everyone Active, offer discounted rates for people between 55 to 66 and older, depending on the location. It’s also worth checking your local council website, which may provide other deals. In addition, your new retired lifestyle may leave you with time to snag an off-peak membership, which can mean cheaper prices and a quieter gym that fits well into your schedule.  

For most activities, it’s worth checking if there’s a discount. Keeping an ID handy to show you’re eligible can mean significant savings on anything from museums to theatre tickets to the zoo. If it’s available, you might as well use it! It may seem like small savings at the time, but all the little pieces can add up quickly. It’s common to estimate how much you will spend in retirement based on your current lifestyle, but factoring in these extra savings can help create a more achievable figure.  

Keeping up an income stream  

Retirement can be a jarring shift in lifestyle and increasingly, people are opting for a gradual transition. For many this means moving away from a full-time employment role into an advisory position or contract work, which allows for more flexibility and independence without the shock of a completely new schedule.  

This also means that you’ll continue to have a stream of income that can boost your retirement pot or at least mean you can leave it untouched for a few more years to allow it to continue growing. However, it’s important to remember the rules around making withdrawals and further contributions.

You can continue to receive income tax relief on your pension contributions up to age 75, up to 100% of your UK earnings, or £3,600 if lower. On top of this there is an annual allowance of £60,000 which includes both your, and any employer, contributions. If contributions are more than £60,000 you usually face a tax charge. But once you withdraw any money from your pension that isn’t part of your 25% tax free lump sum, your pension annual allowance will fall to £10,000 instead of £60,000.

Note that this rule is all about how you withdraw, not necessarily the amount. So, let’s say you have a pension pot of £500,000, and choose to take your tax-free lump sum of £125,000. You can do this, and pay in pension contributions from you, and maybe your employer, of up to £60,000 a tax year, if you have sufficient level of UK earnings. However, let’s say instead you take out £100,000 from your pension pot, and choose to only use a portion of your tax-free lump sum, so £75,000 of the withdrawal is subject to income tax. Then, your contributions would be capped at £10,000 per year. In addition, you can't take your tax free lump sum with the intention of then using that money to make larger pension contributions in the future.

So, if you plan to kick off your retirement with a big holiday or other expense, be careful about how you make your withdrawals if you think a partial return to work could be in your future.