Overview
Retirement is not the same path for everyone and there can be many twists and turns. As retirement experiences differ, there is an increasing need to manage finances throughout the retirement journey.
The line between 'before' and 'after' can be blurry
These days it’s not always possible to know when work ends and retirement begins. It’s increasingly a transition. Nevertheless, there is usually a signal, perhaps reduced working hours or a move to a less stressful role, which suggests a change has begun that is likely to lead to outright retirement at some point. This trend towards a phased process of retirement usually has a financial impact. There may be a shortfall in earned income that could be dealt with in several ways. There’s more information on the implications of using different sources of income in our report The changing face of retirement.
Changes in expenditure
Beyond any transition to retirement, expenditure is likely to change throughout retirement. Conventional wisdom suggests expenditure is usually highest in the early years of retirement. This is the point when people will still be in good health and leading an active lifestyle. At some point, health may begin to deteriorate, which means less income could be required. However, further into the journey, costs can spiral upwards if expensive care needs arise.
What’s more, the timing of any change is difficult to predict. One person may lead an active lifestyle during a long and healthy retirement then die suddenly; while another may fall seriously ill shortly after retirement and require expensive care costs for the rest of their life. Between these two extremes there are infinite permutations.
Helping employees to be prepared and think ahead
There are many reasons why financial plans can run into difficulty during retirement. These could include taking too much income, poor investment markets or unexpected healthcare needs. Whatever the reason, what can someone do if they find they’re running out of money?
- Use other assets. For many people, this could mean using the equity in their home. Downsizing is a way of releasing equity, but there may be a reluctance to sell the family home. In which case, equity release can help. These products have come a long way over the years and now offer important safeguards.
- Review retirement options. Income drawdown, where the pension pot remains invested and provides an income (often by keeping a cash reserve), has become increasingly popular over the years. However, in time it may become increasingly difficult to match the income that an annuity can provide without the risk of running out of money. For example, at age 75 an annuity could provide a lifetime income of over £9,500 per year for a £100,000 pension pot1. This is a level annuity so won’t increase with inflation, but given expenditure often decreases during later retirement this may not be a barrier.
- Return to work. The word ‘unretired’ has recently entered the financial services lexicon. It describes people who have retired, but subsequently decide to return to work. The driver may be boredom or a desire to stave off loneliness, but often the reason will be to boost income.
There is also always the option to reduce expenditure. If expenditure is divided into three pots: essential, important and discretionary, people can start to look at their discretionary spend to assess where savings could be made.
There are other issues that can disrupt retirement plans. For example:
- Mental health. A decline in mental health means people need to act to protect their finances. One solution is to appoint a power of attorney in advance of suffering from mental health. There are different types of power of attorney. For someone who only wants to pass control of their affairs when they lose mental capacity (unless they give specific permission before), a lasting power of attorney is the solution. There are two types of lasting power of attorney:
- Health and welfare gives an attorney the authority to make decisions about medical care and moving into a care home, for example.
- Property and financial affairs means an attorney can manage money and property, including paying bills.
- Taxation. The recent decision to make unused pension funds liable to inheritance tax on death after April 2027, is an example of the impact of tax changes on retirement finances. These changes may only affect a small number of retirees, but they are a timely reminder of how tax and regulatory changes can influence financial planning and efficient use of assets to provide income in retirement. Currently, people who are likely to face an inheritance tax bill may be encouraged to take income from non-pension assets, as pensions enjoy preferential treatment particularly on death before age 75. This approach may well change post April 2027.
Getting married, remarried, divorce or the death of a partner can also have a substantial impact on retirement finances.