According to the Pensions and Lifetime Savings Association, the annual income needed in retirement continues to climb, with current benchmarks set at £14,000 (minimum), £31,300 (moderate), and £43,100 (comfortable). For today’s younger generations, these figures are expected to rise significantly due to inflation, longer life expectancy, and shifting lifestyle expectations. This is compounded by the likelihood that many will still be paying rent or mortgages in retirement - unlike previous generations who typically owned their homes outright from a younger age.
Despite the growing cost of retirement, recent data from Moneyfarm highlights a concerning disconnect between pension participation and understanding. While 92% of people are currently paying into a pension, only 44% have a clear idea of what their pension could be worth in retirement, and just 43% have a defined strategy to reach their retirement goals. Furthermore, 59% of respondents do not know what risk portfolio their pension is in, and 47% admit to finding pensions confusing. These figures underscore the importance of proactive pension management.
To help individuals navigate this evolving landscape, Moneyfarm outlines five key steps to maximise pension savings:
1 Use cash wisely - Don’t let it drain your wealth
Maintaining a cash buffer to cover the cost of essential expenses is a smart way to manage short-term needs and unexpected costs. However, holding too much in cash can quietly erode your wealth due to inflation. The key is to strike a balance: keep enough liquidity for peace of mind, while ensuring the rest of your capital is working for you in growth-oriented investments.
2. Prioritise withdrawals from General Investment Accounts
General investment accounts lack the tax advantages of ISAs and pensions. Drawing from them first can help reduce future Capital Gains Tax liabilities and preserve the tax-efficient growth of your other accounts. With CGT allowances tightening, this strategy can significantly improve long-term outcomes.
3. Blend Withdrawals to Stay in Lower Tax Bands
Instead of looking straight toward your pension to fund your retirement, a more effective approach is to consider drawing strategically from both ISAs and pensions. This coordinated approach can help to maximise your retirement savings while minimising tax. The key benefit of ISA withdrawals is that they are completely tax-free, and so is 25% of your pension, whilst the remaining 75% of pension withdrawals are taxable as income. By blending income from both sources, you can make full use of your tax-free personal allowance and help stay within lower tax bands.
4. Consider deferring your State Pension
If you don’t need your State Pension immediately, deferring it can increase your payments by nearly 5.8% per year. For instance, a one-year deferral could boost your weekly income by around £13.35. This can be a valuable strategy for enhancing long-term retirement income, especially if you have other sources of income in the meantime.
5. Prepare for Inheritance Tax Changes
From April 2027, pensions may be included in your estate for Inheritance Tax. This means your beneficiaries could face both IHT and income tax on inherited pension assets. Drawing earlier or using estate planning tools like gifts and trusts can help reduce this burden. Strategies such as Potentially Exempt Transfers (PETs) or setting up trusts can gradually reduce the size of your estate and protect your legacy.
Carina Chambers, Technical Pensions Expert at Moneyfarm, commented: "While retirement may seem a long way off, it's not something we can afford to neglect or keep postponing. Our research shows that 57% of people don’t have a pension strategy, and nearly half admit they find pensions confusing. There's a good reason for this - regulations keep changing, the rules often feel like they’re being rewritten, and living costs continue to rise. However, by following just a few simple steps, including blending withdrawals from different sources to minimise tax; planning for IHT changes and maintaining an effective but not wasteful cash buffer, you can put yourself in a much stronger position to build a comfortable pension pot, gain peace of mind, and look forward to a more secure retirement.”
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