This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxford).
How do you generate a sustainable, comfortable income in retirement? For most of our working lives, our lifestyles are supported by a salary. As such, the thought of living off your savings and investments for 30+ years can sound strange. Given the complexities and timescales involved, careful planning is needed. This helps you mitigate taxes and costs which could eat into your retirement income, avoid dangerous withdrawal rates and manage risk so that your lifestyle is not jeapordised should the markets or UK economy experience turbulence.
Retirement income streams
There are many possible sources of retirement income in 2021. Having multiple income streams can be a good way to ensure a more stable lifestyle. These might include:
- Your UK state pension.
- An annuity.
- Income from pension pots (i.e. using drawdown).
- Dividends or withdrawals from individual savings accounts (ISAs).
- Rental income from tenants, such as a Buy To Let.
- Withdrawals from a general investment account (GIA).
- A final salary pension.
- Dividends or other payments from a business you used to own.
Your capital (accumulation of assets) and income in retirement will vary depending on a range of factors. Yet, here at WMM, we look at this from both a tax and lifestyle point of view. In other words, how can your capital and income be deployed in a way that reduces unnecessary taxes, reduces risk and delivers the lifestyle wanted?
You still need to pay taxes when you retire. Careful planning will help ensure that these do not needlessly undermine your financial plan. For instance, in 2021-22 your pension income – e.g. from annuities, state pension, final salary pensions and defined contribution pots – is subject to Income Tax, after your £12,570 tax-free personal allowance is taken into account. However, any withdrawals from an ISA are not liable to income tax. There is also no age restriction on when you can start taking money from an ISA, whilst you must be at least 55 to access any defined contribution pots and at least 67 (in 2021) to access a state pension. Former business owners may also be particularly interested in the £2,000 tax-free dividend allowance, which “refreshes” every financial year. Here, we are trying to highlight that there are many sources of income in retirement – but your “Total Income” may not be completely subject to Income Tax. A financial planner can help you navigate this in a tax-efficient manner.
Could anything happen in retirement to decrease your required monthly income, or lead you to run out of money? Again, here a financial planner can guide you. In 2021-22, for instance, your UK state pension is “triple locked” – meaning the income rises each year with inflation – and will keep going indefinitely. A final salary pension can operate in much the same way. A pension pot, whilst having many benefits (e.g. it can be inherited), can fluctuate in value depending on how markets perform – and could run out if not carefully managed.
Here, a financial planner helps you address the questions: “How much money do I need when I retire?” and “Am I on track to achieve this?” It can help to divide your monthly retirement costs into necessary and desired expenses. The former would include household bills (e.g. gas and electricity) whilst the latter may encompass spending such as meals out, holidays and new car purchases. Necessary costs will need to be covered by retirement income and capital which is “low risk” in nature, aided by tax-efficient planning. Desired expenses can be scaled back on if needed in retirement, so could be funded by other sources such ISAs and defined contribution pension savings. Your particular case may look very different, however.
Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469