Let’s not understate it, retiring is a big deal. For many, it sits alongside other major life events including graduating from school or university, getting married, moving into a first home, and welcoming children and grandchildren.
From saving to spending
Retirement also represents a major shift in our financial habits. We spend the majority of our working lives contributing into pensions and saving cash for a rainy day, so the psychological switch from accumulation to decumulation can sometimes feel uncomfortable. After years of building wealth, suddenly being asked to spend it can feel counterintuitive.
Retirement can certainly involve endings. Leaving behind a career which once provided a sense of purpose and routine can lead to strong feelings of unease, restlessness, or even loss. The reality is that many people enter retirement with a strong fear of running out of money. That fear is understandable but left unchecked it can lead to overly cautious spending and, in some cases, later-life regret.
But retirement is also a new beginning. With the right planning, it becomes less about asking “Will my money last?” and more about asking “What can I do with the money I have?” That is a much more positive conversation, and often the one that leads to a more fulfilling retirement.
The role of cashflow modelling
A common starting point is the well-known “4% rule”. In 1994, William Bengen suggested that drawing 4% of a portfolio in the first year of retirement, then increasing that amount with inflation, had historically provided a sustainable income over a 30-year period. Whilst this approach could work for some people, it assumes retirees never adjust their spending.
In practice, everyone’s retirement is different and spending is rarely a straight line. More recently, research by David Blanchett found that spending in retirement more commonly forms the shape of a smile. For example, the early years may involve more travel, home improvements, helping family, or reigniting lost passions and hobbies. This spending trends downward in the middle retirement years and finally rises again in later life due to healthcare needs.
This is where cashflow modelling can be particularly valuable. By stress-testing assumptions around lower-than-expected investment returns, higher inflation, the impact of an unexpected early death on the surviving spouse, and potential long-term care needs, it can help answer one of the biggest retirement questions: “Can I afford to do this?”
The key point here is not that any single percentage has to be followed rigidly. Rather, a considered withdrawal strategy can help turn retirement savings into meaningful spending with greater confidence.
Financial planning could just be starting
There are also practical planning opportunities that can continue long into retirement. The Inheritance Tax (IHT) Nil Rate Band in the UK has been frozen at £325,000 since 2009 and is set to remain frozen until April 2031. The £175,000 Residence Nil Rate Band, introduced in 2017, was designed to provide an additional inheritance tax allowance on the value of a main residence being left to direct descendants. However, despite its introduction, the immense fiscal drag created by freezing the original Nil Rate Band for so long has steadily drawn more and more estates above the threshold for IHT.
With some planning, there are several ways to reduce this liability. Simply spending and enjoying more of your money in retirement can have a large impact. However, others may wish to support their family and be able to see them benefit from their money within their lifetime. Making use of annual gifting allowances, although small relative to the value of a whole estate, can add up over time if implemented early on. Cashflow modelling can also help to assess what is affordable without impacting your own long-term retirement needs.
Depending on where you live, the value of your home may make up the majority of your estate. If this has increased substantially over the period of ownership, but your other assets are limited, this could make gifting less feasible. However, if retirement income provides a surplus to your needs, it could cover the premiums on a ‘whole of life’ insurance policy designed to cover any anticipated IHT bill upon death.
Alternatively, gifting excess income can potentially be immediately disregarded from your estate so long as it meets these specific conditions:
- It forms part of the donor’s normal expenditure: “Normal” means usual or habitual for that person. Regular or patterned giving evidenced by monthly standing orders is a good example of strong evidence to support this. A one-off gift will not qualify, though the first gift in an intended series can if there is clear evidence of the intention to continue.
- It is made from income, not capital: Examples of income can include salary, pensions, rental profits, interest, and dividends. Gifts sourced from capital such as savings, inheritance, or the sale of a property do not count.
- It leaves the donor with enough income to maintain their normal standard of living: After the gifts (and other normal expenditure), the donor must still be able to meet their usual living costs from remaining income. They should not need to draw on capital to maintain their current lifestyle.
If larger gifts are on the table and you wish to retain a degree of control over how and when your beneficiaries can access the funds, or if you need to retain access to some of the capital for your own needs in the future, trusts can be a valuable tool. With a wide range of trust structures available, each designed for different objectives, the topic is substantial enough to warrant an article of its own.
The point is, estate planning can get complicated quickly, so having the support of a financial adviser who can translate your wishes into a practical and tax-efficient strategy can be very helpful, not only in helping you provide your family with financial support, but by mitigating a potential IHT liability.
On the opposite, much smaller end of the scale, pension contributions may still be possible even where relevant earnings have stopped. In the UK, individuals can receive tax relief on pension contributions up to age 75, and those with little or no relevant earnings may still be able to contribute up to £3,600 gross each tax year, subject to pension rules and eligibility. In practice this would mean a personal contribution of £2,880 receives automatic 20% tax relief of £720.
Although this may seem trivial, an individual retiring at age 65, with the means to make these contributions each year until age 75, would accumulate an additional £7,200 in tax relief alone, before factoring in any interest or return on an investment. For some, this can be a useful way to continue building tax-efficient savings and provide a meaningful boost to retirement provisions.
Spending, or gifting, with purpose
Good retirement planning is not about encouraging reckless spending. It is about understanding what is affordable and what will genuinely improve quality of life. For some people, that may mean taking the family on a long-promised holiday. For others, it may mean reducing financial anxiety, gifting during their lifetime, supporting grandchildren, volunteering, studying, travelling, or simply having the confidence to enjoy the lifestyle they worked so hard to create.
Engaging with a financial adviser can help turn those individual goals into a practical retirement plan. But importantly, your objectives will never remain static. An ongoing relationship with your adviser allows them to evolve your financial plan as your circumstances change and as financial legislation develops, helping to maximise available tax allowances and mitigate tax wherever practical and affordable.
If this article has raised any questions for you, feel free to get in touch!
Written by Jason Mitchell, Independent Financial Adviser at Flying Colours
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Cashflow planning is used as a tool to help illustrate how income, expenditure, and financial arrangements may interact over time. Cashflow planning itself is not a regulated activity. However, where it forms part of regulated financial advice, that advice is regulated by the Financial Conduct Authority.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
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.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.