Transitioning to Retirement: A Short Guide

This content is for information purposes only. It should not be taken as financial advice or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser or financial planner such as ours here at Shorts in Sheffield and Chesterfield.

Planning for retirement can be an exciting time, but is also daunting for many people. After the predictable security of a working life, you will be faced with choices you have never had to deal with before.

Retirement gives you permission to live the life that you want, and should be considered a well-earned reward. While some people visualise their retirement and work towards it from early on, others need a little more guidance.

If you are approaching retirement, this guide is designed to help you make sense of the options open to you and to make those choices easier.


Plan Your Budget

The first step is knowing how much you need to spend in retirement. Certain bills will be unchanged, for example:

  • Utilities (these may actually increase if you are spending more time at home)
  • Council Tax
  • Phone and broadband

But you might find that you can make savings in other areas, such as:

  • Petrol or the cost of commuting
  • You may be able to downsize to one car
  • Incidental costs of working such as clothing, lunches, and socialising with colleagues
  • You might find more time to cook or work on home improvement projects rather than paying for convenience
  • Many retirees have also paid off their mortgage and may even be thinking about moving to a smaller property

Don’t forget to build in any lump sum expenditure such as home renovations, a new car, or the dream holiday you have always planned on taking.

Of course, later in life care fees may need to factor into your budget. However, these costs can be unpredictable, as while some people require full residential nursing care, others manage at home with the support of family, friends, or paid help.

Retirement should not only be about economising. You need to build in some luxuries or fulfilling hobbies. Whether this involves travelling the world, spoiling the grandchildren, or even just taking up a new craft, it’s important to allocate some of your budget to doing what you love.


Income in Retirement

If you have an income in retirement, this can provide you with a basic level of financial security. Some potential income sources include:

  • Defined benefit pensions
  • The State Pension
  • Property rental
  • Dividends from shares you own
  • Employment income if you decide to transition gradually into retirement

While the State Pension may be a small part of your retirement income strategy, it is guaranteed for life and increases in line with inflation, average earnings or 2.5%, whichever is higher. It would take a pension pot valued at around £250,000 to buy an income equivalent to the full State Pension. You can check your State Pension entitlement online at If you don’t have a full National Insurance record, you might be able to make voluntary contributions to top this up.

These income sources may start and stop at different times. A cashflow plan can help you keep track of your income expectations and establish if any top-ups from capital are required.


The Best Use of Assets

Few people today have a guaranteed pension income that covers all of their requirements. Most retirees use a mix of assets to fund their lifestyle.

As a rule, we recommend drawing on lower-growth, less tax-efficient assets first. This is explained below:

1. Cash
Cash should generally be drawn on first whilst leaving an ‘emergency fund’ intact. It is a stable asset which doesn’t fluctuate, but it also has low potential for long-term growth. By using up cash first, you give your other assets time to grow and recover from any market volatility.

2. Investment Accounts
An investment account could hold funds, shares, fixed interest securities and multiple other asset types. Some of these could have high growth potential. However, any income or gains generated will be taxable (subject to certain allowances and exemptions). So it makes sense to either spend this money in a planned, carefully managed way, or to transition the funds into ISAs.

3. ISAs
A substantial ISA pot can take many years to build up, as contributions are limited to £20,000 per year (and were lower in the past). But holding an ISA for the long term is extremely efficient as no tax is payable within the funds or when you switch your investments. Similarly, no tax applies when you withdraw money. So while ISAs are worth holding onto, they are also useful for topping up your income without paying any additional tax.

4. Investment Bonds
Bonds can be complicated, and their position in the order of priority will vary depending on the amount invested, whether the bond is administered in the UK or offshore, how much you need to withdraw and how long you have held the investment. Advice is recommended if you need to withdraw money from a bond.

5. Pensions
Perhaps it is surprising that pensions are last on the list, as most investors save into pensions with the intention of funding their retirement. But there are several reasons why keeping your pension intact can be a good idea:

  • The funds grow free of tax.
  • You can draw a tax-free lump sum of 25%. Leaving the fund invested for longer can increase the lump sum available.
  • Tax is payable on any further withdrawals.
  • Pensions can be passed on free of tax in the event of death under age 75 (unless a Lifetime Allowance charge applies), or taxed at the beneficiary’s personal rate after age 75. Compared with Inheritance Tax of 40% on your other assets, pensions can be the preferable asset to pass on.

Of course, there is no single best approach. Retirees with no other income can find it more efficient to draw on their pensions as this uses up their tax-free personal allowance.

A good financial planner can help you design an income strategy that fits in with your assets and your goals.


Your Investment Strategy

Your investment plan needs to be carefully monitored in retirement, particularly if you are reliant on your funds to support your lifestyle. Here are some tips to help you get it right:

  • Make sure you have your next few years’ spending requirements available in cash, whether this is in the bank or within your pension pot. This means there is less chance of needing to draw on invested funds when the markets are down.
  • The longer the investment timeframe, the more risk you can afford to take. Allocate lower risk assets to short/medium term spending and higher risk assets to investments that you won’t need to draw on for a long time, if ever.
  • Make sure you are comfortable with the overall level of risk. All investments can lose money, so you need to be sure that you have contingencies in place to cope with this.
  • Don’t concentrate your assets heavily in one area. A diverse investment strategy helps to maximise growth while controlling risk.


Consider Gifting

With your own financial security in hand and your goals on track, you might want to think about how you can help others.

Making gifts to your family can help to place them on a secure path when they need it most. It also means that you can see them benefit from the money while you are young enough to enjoy it.

Carefully planned gifts can also reduce your Inheritance Tax bill. The following are immediately outside your estate for IHT purposes:

  • Gifts of up to £3,000 per tax year
  • Regular gifts from surplus income
  • Most gifts for birthdays, Christmas, or weddings (subject to certain limits)
  • Charitable or political donations

Larger gifts remain in your estate for seven years.

Making smaller, affordable gifts over time is usually more efficient. Not only is this more effective at reducing your IHT bill, but it also makes sure that you don’t run out of money.


Maintain a Routine

After the initial novelty of retirement, boredom can set in. A fulfilling life depends on having a sense of purpose. While taking care of family can fill some of the time, this is not an option for everyone.

Some other ideas are:

  • Take up a new sport or creative hobby
  • Volunteer
  • Adopt a dog
  • Start a small business in a field you enjoy


How a Financial Plan Can Benefit You

A financial plan can help you bring all of these puzzle pieces together. With a solid plan you can:

  • Keep track of your spending to make sure you are living within your means
  • Make carefully planned gifts without leaving yourself short
  • Pay less tax by structuring your income efficiently
  • Co-ordinate your investment strategy with your financial plan to ensure that your assets suit their intended purpose
  • Address any risks
  • Develop an estate plan which results in more of your money going to those you intended, while minimising Inheritance Tax
  • Give yourself the best chance of achieving your goals
  • Make more time for the things you enjoy



Please do not hesitate to contact a member of the team to find out more about your retirement and financial planning options. Book a free call with a member of our team today, without obligation. We look forward to speaking with you.