New research from the Institute for Fiscal Studies (IFS) examines how the spending of recent retirees changed as they aged, over the period from 2006 to 2018.
The average spending of recent retirees with higher-than-average incomes increased through their 60s and 70s. Spending increases were driven in large part by increasing spending on holidays and declined only once people were into their 80s.
Increased incomes were also noted, driven by higher state pensions and receipt of survivors’ benefits.
One curious consequence of this, and despite spending rising until about age 80, is that current retirees save more of their income as they get older.
The research also highlighted that whilst spending rose for higher-income people, those with lower incomes saw their spending remain broadly flat as they moved through retirement.
Although life expectancy is unknown, using a longevity estimate, the results suggest that a female age 60 today, in excellent health, could live to age 94 and a male to the average age of 92, according to Longevity Calculator. Based on these estimates it’s important retirees plan for over 30+ years. However, they should be aware there is a 50% chance they may live beyond this age and therefore they need to think very carefully when considering how long their income may need to last.
The IFS research has important implications for future retirees. The desire and need to spend do not necessarily appear to fall as you age.
In the new, complex world of low-interest rates and high inflation, people should consider a financial review to help prevent having to cut down on spending as they get older.
Pension options for retirement
Several methods can be used to access pension benefits. Not every option will be available for each pension contract and it’s important to check with the pension companies to confirm which options apply to you.
You can take a cash lump sum, set up a regular income, leave it for now and keep the money invested, or a combination of all three:
1. Taking cash
Use your pension as and when you need it before you retire to fund a need or dip in during retirement
- You can take cash whenever you like from age 55; normally the first 25% is tax-free
- No need to take it all at once
- Your remaining pension stays invested
- Potential for tax-efficient investment growth, however, risks apply
- Any remaining pension can pass to a partner, family, or friends when you die
Take your whole pension as cash
- You can cash in your pension whenever you like from age 55
- Payments above your tax-free cash are liable for tax
These options may restrict how much you can pay into pensions in the future.
2. Guaranteed income for life (annuity)
Guarantee income for the rest of your life
- Guaranteed for life
- A one-off decision, set up, enjoy and spend
- An income just for you, not for your spouse or partner
- It’s not flexible – once set up you can’t normally change your income
Guaranteed income for two
- Guarantee income for two…you and your partner
- Guaranteed for you or your partner’s lives
- Protects your partner when you die
- It’s not flexible – once set up you can’t normally change your income
3. Leave it for now
Continue supporting your family or friends even when you die – pass on your pension inheritance tax-free
- Can still set up an income or take cash if you need to
- Your pension can pass to your partner, family, or friends when you die, normally tax-free if you die before age 75
- Normally not liable for inheritance tax – your pension stays outside your estate
- Your pension stays invested giving potential for tax-efficient investment growth, however, risks apply
Leave your pension with the potential to build and grow yet still have the option to take cash or income when you need it
- Carry on paying in, benefiting from tax relief while you’re still earning
- Your pension stays invested giving potential for tax-efficient investment growth, however, risks apply
- Can change your mind and take cash or income if you need to
You could also use a blended approach
- Start with a flexible income (drawdown) you can change if you need to and then guarantee it later by fixing it (annuity)
- A flexible income (drawdown) you can change and adjust. Your income will stop when your pot runs out
- Bridge the gap by taking an income until other pensions kick in (drawdown) – this could be a regular income for a shorter time
Obtain advice
It is always advisable to seek professional financial advice when approaching retirement.
A financial adviser can help you to decide how much money you will need to retire comfortably and how you can take your pension money when you retire.
How can we help
Zoe Till is a Senior Associate and Chartered Financial Planner in our expert Investment Management team.
For further advice on the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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