The fundamentals of a good retirement plan

We often meet potential clients who are a couple of years either side of retirement and feel they are ‘shooting in the dark’ with their planning. We understand why. Working out how pensions, investments, tax, and inflation may play out over several decades is far from straightforward. Bringing those factors together into a clear set of decisions can be harder still. Without a clear plan, there is a risk of retiring without sufficient financial resilience. We more often see some clients have worked for longer than necessary, missing out on those golden years of retirement.

So, what are the foundations of a robust retirement plan?

The five fundamentals of a good retirement plan

1. Define the lifestyle you want in retirement.
2. Understand all your pensions, savings and investments.
3. Build a reliable income floor using guaranteed income sources.
4. Invest remaining assets with inflation and longevity in mind.
5. Plan for later-life considerations such as care costs and inheritance.

What kind of retirement do you want?

Any plan is only as strong as the assumptions used to build it. When we consider that ‘Objective A’ for all our clients is to meet their expenditure requirements for the rest of their lives, we need to start by understanding what these lifestyle needs entail.

We work with clients to set clear retirement objectives and typically group spending into the following areas:

• Basic expenditure: housing, food, transport, clothing, and personal costs
• Discretionary expenditure: holidays, hobbies, and leisure
• Lump sum expenditure: home improvements, replacing a car or helping family

Clients often tell us that they do not live extravagant lifestyles. However, research from Retirement Living Standards suggests that a comfortable retirement for a couple in 2025 could require net annual income of more than £62,000. The financial requirement can therefore still be significant, especially after allowing for tax on retirement income.

Of course, everyone’s spending will be different, as will views on which items would be considered essential to enjoy life as you want to. We have provided further reflections on retirement spending patterns in [this article].

It is also important to consider the major milestones on your retirement journey. When would you like to retire? Is retirement a ‘hard stop’ event or, as we increasingly see, a phased transition over several years? Are there health factors or a history of family longevity that we should be considering? These all help us to build a timeline to work with.

Later in this article, we consider two further objectives that may form part of your plan: funding care costs and planning your family legacy.

What assets and income sources will fund your retirement?

Having identified where you want to get to, the next step is to understand the assets and sources of income you have built up during your working life. The most common of these would be:

• State Pension: much discussed and often undervalued, a full UK State Pension provides a little over £12,500 per individual, or £25,000 for a couple. For many, that provides a secure first layer of retirement income that takes care of a meaningful proportion of basic expenditure. It’s always worth checking your State Pension forecast as you approach retirement to understand the level of pension you are on track to receive.
• Defined Benefit Pensions: Defined benefit pensions offer a promise of income from a set age. Whilst the number of active members of private sector defined benefit pensions continues to decline, many people have benefits preserved in former schemes. In addition, many people have public sector pensions with defined benefits. We regularly come across old pension entitlements that clients assumed had little value because they were members for only a few years. In practice, these benefits can still provide several thousand pounds of annual income. Start by requesting an up-to-date benefit statement and a forecast of entitlement at the scheme’s normal retirement age.
• Defined Contribution Pensions: A defined contribution pension is an invested pot over which you generally have more control. As defined contribution schemes have become more common, many people have built up several pension pots with different providers, making them harder to keep track of. You should get in touch with your pension providers and request up-to-date benefit statements. It’s also helpful at this stage to consider whether you have final opportunities to boost pension savings through tax-efficient pension contributions.
• Savings and Investments: of course, your retirement provision might not be exclusively pensions-based. Indeed, with various reductions to pension allowances (e.g. the Lifetime Allowance, Annual Allowance) over the years, high earners have often pivoted to a broader set of savings vehicles. Again, it’s important to refresh your understanding of what you have saved, how it is invested and how it aligns to your objectives.
• Business Assets, Rental Properties, and Inheritances: whilst not considered in depth in this article, there are, of course, several other events that might be relevant to your retirement plan. Perhaps there are business assets, with consideration needed to whether these are to be used to provide income, capital, or left to the next generation. Similar considerations apply to any rental properties. Future inheritances might be something that needs to be considered, even if not always fully knowable.

How to make the most of your guaranteed income?

Once you understand the assets and income available, the next step is to compare your desired level of guaranteed income with your spending needs. The right balance is different for everyone, but it can be reassuring to secure at least a base layer of expenditure with guaranteed income. The decision also depends on your attitude to investment risk, as usually the alternative to securing guaranteed income is retaining invested assets with the aim of greater growth.

• State Pension: don’t forget that it’s often possible to top-up your State Pension entitlement if you have gaps, through making voluntary National Insurance contributions. It’s always worth checking your State Pension forecast as you approach retirement (remember, you typically require 35 qualifying years to secure the full State Pension).
• Defined benefit pensions: Most defined benefit pensions offer choices about when benefits begin and whether to take a tax-free lump sum. Starting benefits earlier or later than the normal retirement date will usually decrease or increase the annual income payable. Similarly, while it might seem attractive to take a large tax-free lump sum, this will often reduce the ongoing pension. Pension providers apply their own factors for these adjustments, and these can vary significantly, so it’s important to think it through.
• Defined contribution pensions – annuities: a decision that you may be facing at retirement is whether to use some or all of your pension savings to buy an annuity. With the removal of compulsory annuitisation, this becomes a significant financial decision, with advantages and disadvantages. If the desired level of guaranteed income isn’t provided for elsewhere, a pension annuity provides one of the few routes to generating more guaranteed income in retirement. Options such as inflation protection and continuing income for a spouse or partner will affect the amount initially payable, so will need to be carefully considered.

How should your investments change in retirement?

Once you are making effective use of guaranteed income, attention turns to the assets that remain invested. Clients often come to us with a presumption that they should automatically reduce investment risk as they retire. This will be right for some, for instance if they feel less risk-accepting now no longer in receipt of earned income, or if their plan doesn’t afford or require them to maintain a higher level of investment risk.

However, most people’s retirement investments still need to last over 20 years and in many cases much longer. That is a long time, and decisions for most people should retain a long-term view. With the cost of goods and services more-or-less doubling over the last 25 years, inflation is the real enemy that we need to protect against through appropriately diversified investments. Remember that taking too little risk, and not getting enough return, can also be a threat to a strong long-term financial plan.

It’s always important to maintain a cash reserve throughout retirement that enables you to meet those unexpected costs and to help avoid having to dip into investments at times of negative market volatility. Avoiding selling assets in the negative periods that are an inevitable and normal feature of the investment markets can really extend the longevity of the fund.

What other financial risks should your retirement plan include?

One area that is difficult to predict is the potential cost of future care. For some people, these costs can be substantial, particularly later in life, while others may never need to pay them. Good planning is about finding a sensible balance between enjoying retirement and having a contingency plan should significant expenses arise. We consider planning for care fees in more detail in a separate dedicated article.

Retirement is also when many people begin to consider their Inheritance Tax position more closely. A full financial review can help establish whether you have sufficient financial security to start planning how wealth might pass to family, charities, or other beneficiaries. This may be particularly valuable at a stage when children or grandchildren could benefit from financial support. However, your own security should come first. Any gifting or legacy strategy should sit alongside a clear plan for the retirement you want to live. This is increasingly important considering the changes from April 2027, which will bring unused pension funds within the scope of Inheritance Tax. This change could lead to pension benefits being subject to both Inheritance Tax and Income Tax on death.

Frequently asked questions about retirement planning

With clear objectives and careful consideration of the fundamentals, you can build a financial plan that supports informed decisions throughout retirement. A good adviser can help you work through these decisions, test whether your plans are sustainable and give you greater confidence about the years ahead.