26 Mar 2025
With changes in pension regulations, tax treatment, and investment strategies shaping how advisers support clients, retirement planning has undergone significant transformation over the years. Historically, HMRC emphasised that pensions were solely for providing income in retirement, but legislative changes have led to a shift in approach. With further changes in the pipeline from April 2027, advisers are having to adapt to the evolving landscape as it unfolds.
What’s happening in pension planning? The introduction of drawdown in 1995, followed by capped drawdown and flexi-access in 2015, facilitated greater flexibility in accessing pension funds. Enhanced death benefits encouraged wealthier clients to preserve pension assets for inheritance planning rather than drawing income but the government’s proposed shift to include unused pension benefits in estates for inheritance tax (IHT) from April 2027 is likely to disrupt the backdrop once again, driving a return to prioritising pension withdrawals over other assets.
The way we see it, advisers must align investment strategies with their clients’ income needs, risk tolerance, and regulatory changes and there are four broad retirement investment approaches to consider.
Annuities: A resurgent option - Rising interest rates have reignited interest in annuities as a stable income source leading many advisers to incorporate annuities to cover essential expenses while using invested assets for discretionary spending. This hybrid approach balances security with growth potential.
Natural income investing - Some clients prefer an income-focused portfolio, drawing dividends and interest rather than selling assets. This provides a relatively predictable income stream, but yield levels and costs need to be carefully considered. For example, the main UK index currently yields around 3.49%, but after adviser and platform fees, net income may be closer to 2%, which, in isolation, may not be enough.
Growth-focused investment with drawdown - Many advisers maintain portfolios like those used during the accumulation phase, with an emphasis on long-term growth but with this approach comes sequencing risk - withdrawals during market downturns deplete assets prematurely. Addressing capacity for loss and stress-testing withdrawal strategies can help mitigate this risk and with this in mind, the FCA’s Retirement Income Review is urging advisers to reassess clients’ risk attitudes post-retirement.
The bucket strategy - This method involves segmenting assets into short-, medium-, and long-term allocations. Typically, cash reserves cover immediate expenses, with diversified investments addressing medium-term needs, and equity-heavy portfolios catering for long-term growth. Regular rebalancing ensures liquidity, but performance drag from excessive cash holdings and coordination with discretionary managers can be challenging.
How can we navigate the future of retirement planning? With proposed IHT changes on the horizon, advisers must reassess the optimal order for drawing retirement income. This may mean prioritising pension withdrawals or leveraging alternative assets, but a flexible, client-centric approach should always be central to the model. By carefully considering risk, income needs, and regulatory shifts, advisers can adapt to an ever-changing landscape and craft a framework that provides financial security.
One concept that seemed promising was a packaged product combining invested assets with annuities, allowing unused annuity income to be reinvested tax-efficiently, but despite its potential benefits, uptake was limited with many advisers preferring to manage the strategy themselves using separate products.
True innovation in this space remains a challenging notion. Even if an investment manager develops a solution that provides 4.5% income after charges, most advisers would hesitate to recommend it without a solid track record and the reluctance to embrace untested strategies limits the pace of change.
For many, pensions remain the primary retirement savings vehicle, benefiting from attractive tax advantages but alternative options such as ISAs and property investments should also be in the mix. ISAs offer much greater flexibility, but their accessibility can also be a weakness if funds are depleted too early.
Without knowledge of what the future holds, what’s the best approach? A well-diversified growth portfolio aligned to the client’s attitude to risk remains a strong strategy, with assets invested for long-term growth while units are cashed in as needed. Regardless of the model, the key lies in regular reviews - adjusting income, ensuring investment suitability, and aligning with changes in risk appetite. Retirement planning isn’t a one-time decision but an ongoing process of monitoring and adapting.
Dominic Brooks, Business Development Manager
Katie Sykes, Client Engagement & Marketing Manager
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