How to help your retirement income last when costs are high

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Your pension plan is there to help you fund your life in retirement. But how can you make your pension savings last for as long as you need them to when the cost of living has gone up so much? We have some tips that could help you prolong your retirement income while costs are high.

How high costs affect your pension savings

It’s no secret that life has become more expensive. Interest rates are higher than they’ve been for almost 15 years, meaning it could now cost you more to pay back money you’ve borrowed, like a mortgage. And essentials like food and energy have gone up in price.

What does this mean if you’ve started accessing – or will soon access – your pension savings? Basically, your money probably needs to stretch further now. This means you’ll need to be extra careful that you don’t use up your pension savings too quickly and risk them running out further down the line. 

Remember, you can normally take your pension savings from age 55 (rising to 57 from 6 April 2028). 25% of your plan’s value is normally tax-free.

Understand how much you need in retirement

When you take your pension money, anything above your 25% tax-free entitlement will normally be taxed in the same way as income. Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

So, for example, if you were to take a much bigger lump sum than you actually need, you could end up with a large tax bill and less money in your pension plan in future. Understanding how much money you’re likely to need in retirement could stop you from taking too much from your pension plan now, meaning you could have more money in future. 

Look at your outgoings to get a clearer picture of where your money’s going. It might be worth having a budget and seeing if you can adjust your spending. There won’t always be areas where you can cut back. But if there are, you might be able to take less from your pension plan.

You could also check the Retirement Living Standards from the Pensions and Lifetime Savings Association. The standards have been updated to reflect rises in the cost of living. They show how much money you might need (after tax) each year, depending on your lifestyle in retirement. 

Don’t forget, life expectancy plays a part in how much you might need in retirement. The longer you live, the longer your pension savings need to last.

According to the Office for National Statistics (ONS), the life expectancy for a 66-year-old male is 85 years old. For a 66-year-old female, it’s 87. So if you retire at 66 (which is the current State Pension age, although that’s rising to 67 by 2028), your pension savings may need to help support you for another two decades. You can see your life expectancy based on your own age on the ONS website. 

Overall, working how much you might need could be a good starting point when it comes to making sure you’ll have enough in your pension pot later.

Consider other sources of income

It’s worth considering whether you have other sources of income that could let you take less from your plan.

For example, if you’re still earning money from work, or you’re going back into work soon, you might find you can afford to withdraw less from your plan. Or if you have money in an Individual Savings Account (ISA) or other savings accounts, you could think about using this to top up your retirement income. You won’t pay income tax on any interest you get from a cash ISA, so this could be particularly helpful while costs are high. 

By taking less from your plan, more of your pension money stays invested. Generally, the longer your money is invested, the more opportunity there is for your pot to grow, which could mean you have more money in retirement. 

Remember, a pension is an investment. Its value can go down as well as up and may be worth less than was paid in. 

You can start claiming your State Pension when you reach State Pension age, which could take some pressure off your pension savings. To find out how you could potentially boost your State Pension, read our article on making voluntary National Insurance contributions.

Review where you’re invested

When you have a pension plan, you can normally choose where your money’s invested or have experts deal with this for you.

If someone else has been handling your investments, you could find your money’s been moved into lower-risk funds as you’ve approached your retirement date. If you’ve gone down the do-it-yourself route, you’ll normally be responsible for changing your own investments, if that’s what you want to do. 

Either way, it’s important to check that you’re comfortable with your investments. You might want to change them, and you can often do this online. 

You may want to take a bit less risk with them once you’ve reached – or as you approach – retirement. If you’re invested in funds that are more vulnerable to dips in the market and you then start making withdrawals, you’ll have less money invested to potentially recover losses. This could cause your money to run out sooner.

Ultimately, you’ll need to think carefully about what’s right for your own circumstances. If you’re unsure, it could be worth getting financial advice. If you don’t already have a financial adviser, you can find one at Unbiased. You can check if an adviser has been authorised by the Financial Conduct Authority (FCA) on FCA.org.uk. 

Looking for more support?

If you haven’t settled on a retirement option yet, read our guide about ways to take your money.

If you’re over 50 and have questions about retirement, you can join one of our retirement webinars. 

You can also visit Pension Wise – a service from MoneyHelper – if you’re over 50 and want free, impartial guidance on how to take your money. 

And if you’re concerned about your financial situation and want more resources, take a look at our support with everyday money worries page.

The information here is based on our understanding in June 2023 and shouldn’t be taken as financial advice.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.