Thinking about retiring in 2025?

Your retirement objectives should dictate your financial plan, not the other way around. Ask yourself:

• Do you prioritise capital growth or stable income? Some individuals focus on growing their portfolio to support a longer retirement or leave a financial legacy. Others prioritise generating reliable income streams to fund day-to-day expenses.
• How much flexibility do you need? Unexpected costs—such as healthcare, home renovations, or family support—can arise. Ensuring liquidity in your portfolio is key.
• Are there legacy or philanthropic goals? If passing wealth to future generations or supporting charities is a priority, your investment and estate planning strategies must reflect this.

Most retirees fall into one of the following categories—or a combination of them:

1. Growth-Focused – You may aim to increase your purchasing power over time, ensuring your investments outpace inflation. This approach suits those with a long investment horizon or wealth they intend to pass down.
2. Income-Focused – Generating sufficient cash flow to cover essential and discretionary expenses is the main goal. A structured withdrawal strategy is key to making assets last.
3. Balanced Approach – Many retirees require both growth and income to maintain financial security over multiple decades. A well-balanced portfolio allows for withdrawals while preserving capital for the future.

Understanding your time horizon is critical:

• If you retire at 60 with a long family history of longevity, your portfolio may need to last 30+ years, requiring continued investment growth.
• Conversely, if you plan for a shorter retirement window, preserving wealth and minimising volatility may take precedence over long-term appreciation.

By defining clear goals, you create a roadmap that informs every financial decision—from asset allocation to tax planning.

A well-structured portfolio should provide both growth and stability. Key considerations include:

• Diversification – Are you overly concentrated in a single asset class, such as equities, property, or cash? A well-diversified portfolio mitigates risk while capturing growth opportunities.
• Liquidity – Do you have sufficient accessible funds to cover unexpected expenses without disrupting your investment strategy? Cash holdings should be balanced against inflation risk.
• Volatility vs. Stability – Is your current allocation too aggressive or too conservative for your retirement objectives? While equities provide long-term growth potential, fixed interest investments (such as bonds and gilts) offer stability and income.

Asset allocation is a considerable factor in portfolio returns. However, retirees often make the mistake of becoming either too cautious or too aggressive with their investments:

• Being too conservative – Holding excessive cash or bonds may seem prudent, but it can reduce purchasing power due to inflation. A well-balanced portfolio should include assets that provide growth to sustain long-term income needs.
• Being too aggressive – A high allocation to equities can create unnecessary risk if market downturns force you to sell assets at a loss. As you near retirement, consider shifting towards a mix that prioritises stability while maintaining growth potential.

Your ideal asset allocation isn’t static—it should evolve based on market conditions, economic shifts, and personal circumstances. Regular reviews ensure that your portfolio remains aligned with your retirement goals.

These are unavoidable expenses that form the foundation of your retirement budget:

• Living Expenses – Day-to-day costs such as housing, groceries, utilities, and transportation. If you plan to remain in your current home, you likely have a good estimate of these. If downsizing or relocating, consider potential cost changes.
• Debt Obligations – Mortgages, car loans, and credit card payments need to be factored in to ensure you can comfortably meet these commitments without depleting assets too quickly.
• Taxes – Your tax liability depends on income sources, including pensions, investments, and withdrawals from tax-advantaged accounts. Strategic tax planning helps minimise unnecessary outflows.

Once essential costs are covered, your remaining budget supports the lifestyle you envision:

• Travel – Many retirees plan to explore new destinations or visit family abroad. Whether it’s an annual holiday or extended stays overseas, travel expenses should be accounted for.
• Hobbies & Interests – Retirement is the perfect time to pursue passions, whether it’s golf, art, music, or learning a new skill. Even low-cost hobbies can add up over time.
• Luxury & Leisure – Dining out, entertainment, or personal indulgences should be factored into your spending plan to ensure a comfortable retirement without financial strain.
• Family Support – Many retirees choose to financially support children or grandchildren, whether through gifts, education funding, or home deposits. Consider how much of your wealth you’re comfortable passing on during your lifetime.

Your retirement income should be structured to cover non-discretionary expenses first, with additional sources funding discretionary spending and future needs. This typically involves:

1. Fixed Income Sources – State Pension, defined benefit pensions, annuities, and rental income provide stable, predictable cash flow.
2. Investment Withdrawals – Drawing from ISAs, GIAs, and pension pots in a tax-efficient manner to optimise your total retirement income.
3. Flexible Access Funds – Cash reserves and liquid investments provide security for unexpected expenses or market downturns.

By carefully structuring income sources, you can ensure financial security while enjoying the flexibility to fund your ideal retirement lifestyle.

Individual Savings Accounts (ISAs)

• Tax treatment: Withdrawals are entirely tax-free (no income tax, dividend tax, or CGT)
• Best use: Ideal for supplementing income while keeping taxable withdrawals lower
• Estate planning: Included in your estate for Inheritance Tax (IHT)

Tip: Since ISAs don’t trigger tax on withdrawals, they can be used to fill income gaps without pushing you into a higher tax bracket. However, they should be balanced against other accounts that might be more tax-efficient for legacy planning.

General Investment Accounts (GIAs)

• Tax treatment: Gains and income are subject to CGT and dividend/income tax
• Best use: Useful for funding additional income needs, but tax planning is essential
• Tax exemption: £3,000 CGT exemption in 2025/26

Tip: Withdrawals should be carefully managed to avoid exceeding tax allowances. Spreading gains over multiple years can reduce CGT exposure.

Investment Bonds

• Tax treatment: Withdrawals of up to 5% per year (of original investment) are tax-deferred
• Best use: Controlled income withdrawals without immediate tax consequences
• Tax on gains: When exceeding the 5% allowance, gains are subject to income tax

Tip: Investment bonds can be beneficial for later retirement years when taxable income is lower, helping smooth tax liabilities over time.

Defined Benefit Pension (Final Salary Scheme)

• Tax treatment: Pays a guaranteed income, fully subject to income tax
• Best use: Provides stability but limited flexibility on withdrawal sequencing

Tip: Since payments are fixed and taxable, other withdrawals should be structured to keep total income within optimal tax bands.

Defined Contribution Pensions (Workplace & Personal Pensions)

• Tax treatment:
  • 25% of withdrawals are tax-free (usually as a lump sum or phased), up to the Lump Sum Allowance (LSA) of £268,275
  • The remaining 75% is taxed as income at your marginal rate
• Best use: Can be drawn flexibly via pension drawdown or used to purchase an annuity

Self-Invested Personal Pension (SIPP)

• Tax treatment: Same as workplace pensions, but with more control over investments
• Best use: Flexible drawdown strategy to balance income and tax efficiency

Tip: Using the 25% tax-free lump sum strategically – either upfront or in phases – can help reduce income tax in higher-tax years. Remember that, from 2027, unspent pensions will be brought inside your estate and subject to inheritance tax.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is dependent on individual circumstances.

• Tax treatment: Taxable income but paid gross (without tax deducted at source)
• Best use: Forms the foundation of retirement income, but may push other withdrawals into higher tax bands
• Full new State Pension (2025/26): £11,976 per year

Tip: If your total income (State Pension + withdrawals) exceeds the personal allowance (£12,570 in 2025/26), additional withdrawals should be planned carefully to avoid higher tax rates.

Many retirees rely on dividends from equity investments as a core income stream. However, it’s important to understand their limitations:

• Regular Income Potential – Some companies pay dividends consistently, providing passive income.
• Dividend Cuts Can Happen – No payout is guaranteed; companies can reduce or eliminate dividends.
• Concentration Risk – Many high-yield stocks cluster in specific sectors, limiting diversification.
• Best Approach: Rather than focusing solely on dividends, consider a total return strategy that balances growth and income.

Instead of relying solely on company dividends, selectively selling investments can provide more flexibility:

• Control Over Timing and Tax Implications – Selling specific assets allows you to manage capital gains tax efficiently.
• Portfolio Rebalancing – Adjust allocations strategically by selling appreciated assets.
• Maximise Allowances – Utilise your annual capital gains tax exemption to withdraw tax-efficiently.
• Best Approach: Sell assets selectively to manage income needs while maintaining diversification and tax efficiency.

Fixed interest securities, such as government and corporate bonds, provide regular interest payments. While attractive for stability, they come with risks:

• Stable and Predictable Income – Bonds offer set coupon payments.
• Inflation Risk – Fixed payments lose purchasing power over time.
• Interest Rate Sensitivity – Rising rates can decrease bond values.
• Default Risk – Some issuers may struggle to meet obligations.
• Best Approach: Use bonds strategically, balancing income stability with growth-oriented investments.

Cash reserves provide immediate access to funds, but holding too much can be detrimental:

• No Market Volatility – Cash is stable and readily available.
• Inflation Erosion – Purchasing power declines over time.
• Opportunity Cost – Cash may not generate sufficient returns.
• Best Approach: Keep a cash buffer for emergencies, but avoid excessive cash holdings that can erode wealth over time.

Annuities provide guaranteed income but come with trade-offs:

• Predictable, Lifelong Income – Provides security against outliving savings.
• Inflation Risk – Fixed payments may not keep up with rising living costs.
• Limited Liquidity – Once purchased, annuities are difficult to adjust or sell.
• Best Approach: If considering an annuity, ensure it complements other income sources and inflation protection strategies.

1. When Should You Start?
The timing of your State Pension can impact your overall retirement income:

• The State Pension age currently ranges between 66 and 68, depending on your birth year.
• Delaying your claim increases payments by 1% every 9 weeks (approximately 5.8% per year).

2. Spousal Benefits & Eligibility

• Your State Pension is based on your National Insurance record, not your spouse’s.

Effective estate planning ensures that your assets are distributed according to your wishes while minimising costs and taxes.

1. Key Estate Planning Questions:

• Who should inherit your assets? (Family, charities, friends)
• Which assets should they inherit? (Cash, property, investments, heirlooms)
• What are the tax implications? (Inheritance tax, capital gains tax)

2. How Assets Transfer Upon Death:

There are three primary ways assets can pass to beneficiaries:

Wills

• A legally binding document outlining how your estate is managed.
• Executors must usually apply for a Grant of Probate to distribute assets.
• Wills alone do not prevent probate but provide legal clarity.

Trusts

• Bare Trusts: Assets are held for a beneficiary who gains full access at age 18.
• Discretionary Trusts: Trustees have control over how and when beneficiaries receive assets.
• Trusts can provide tax efficiency and asset protection but require careful structuring.

Beneficiary Designations

• Life insurance policies, pension plans, and annuities often bypass probate and go directly to named beneficiaries.
• Regularly review designations to ensure they align with your wishes.

Executors & Trustees

• Choose a trusted individual or professional to oversee your estate’s administration.
• They will be responsible for applying for probate and ensuring assets are distributed correctly.

Best Approach: Regularly review and update your will, trust structures, and beneficiary designations to reflect life changes and tax laws.

Reducing Inheritance Tax (IHT):

• The current Inheritance Tax threshold is £325,000 per individual, with an additional £175,000 allowance for a main residence left to direct descendants.
• Spouses can transfer unused allowances, increasing the tax-free threshold to £1 million per couple.

Gifting & Charitable Giving Strategies:

• Gifts up to £3,000 per year are tax-free, reducing your taxable estate.
• Charitable donations can lower IHT liability while supporting causes you care about.

Best Approach: Work with an estate planner to optimise your wealth transfer and mitigate tax exposure.