Chris Newlands
Interest rate cuts, tax changes and stock market volatility can make it hard to decide if this is the year to finally retire.
High interest rates had provided a boost for people choosing to use their pension to purchase an annuity to help fund their retirement in early 2024.
But as interest rates are expected to drop as we go further into 2025, annuities may become less appealing again.
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In contrast, staying invested in the stock market and using drawdown to access your pension pot also has risks, with the election of Donald Trump and concerns about UK economic growth weighing on the stock markets.
Chancellor Rachel Reeves also put a spanner in the works of many people's retirement plans during her Autumn Budget by announcing that pensions will form part of your estate, for inheritance tax purposes, from April 2027.
Older investors considering retiring will be wondering how many more times interest rates will be cut and if they can still pay the bills even if inflation is showing signs of slowing.
We consider the factors that could make 2025 a good or bad year to retire.
How much do you need to retire?
Single retirees need a typical income of £43,100 for a comfortable retirement or £59,000 for a couple, according to the Pensions and Lifetime Savings Association (PLSA).
Analysis by Quilter suggests a single person would need a pension pot worth £738,000 to buy an annuity with enough income for a comfortable retirement, or £929,000 for a couple. There may be other sources of income that can help such as the state pension or a buy-to-let portfolio. The difficulty is that no one knows how long they will be retired.
James Corcoran, chartered financial planner at Lumin Wealth, says: "As life expectancy increases, retirees face the risk of outliving their savings.
"Planning for potentially 30-plus years in retirement adds complexity to financial forecasting."
Make use of the state pension
Pensioners' incomes have already been boosted by a rise in the state pension since the start of the new tax year in April thanks to the triple lock. The state pension increased from £203.85 to £221.20 from April 2024 or to £11,500 per year and is set to rise again to £230.25 per week.
Ed Monk, associate director at Fidelity International, says: “The state pension is an important component in any retirement plan, offering a guaranteed income protected against inflation - which is expensive to replicate elsewhere."
But James Norton, head of retirement and investments at Vanguard Europe, warns against solely relying on state support, saying it is important to have private pension savings.
“The first step to closing the gap in your pension savings is to understand how big the gap is and whether you’re on track for the retirement you want,” he says.
“Start by checking how much money is in each of your pension plans and how much you’re paying into your pension each month, in order to estimate the size of your pension pot at retirement.
“Even if you can’t save more into your pension right now, there may still be ways to boost the size of your pot.
"For instance controlling your costs can have a significant impact on your pension savings, as fees can eat into your investment returns over time. Additionally, it might be worth bringing your multiple pension pots together into a single plan, as this can cut down on admin and make it easier to see how much you’ve saved.”
Should you consider an annuity or dabble with drawdown?
Annuities have long been ignored by retirees due to poor rates, but as interest rates and gilt yields rose over the past year or so, annuity rates have looked more attractive. This gives retirees something extra to think about when it comes to accessing their pension pot.
The start of 2025 has seen a sharp increase in the yields on long-term UK Government bonds, or gilts, the assets used to underpin annuity prices.
Monk says: “As of the start of January, the highest-paying annuity would generate an income of £5,509, based on £100,000 pension pot for a healthy individual aged 65 and with a 3% increase in payments each year to mitigate inflation."
Do they opt for the flexibility of drawdown – where you stay invested and make withdrawals as you wish? Or, is the certainty of buying a fixed income for life, through an annuity, a better bet? It's worth noting that since the Bank of England started cutting the base rate annuity pricing has been coming down.
Monk adds: “Those planning on using an invested pension to generate an income may well have seen their pots grow recently thanks to the strong recovery in stock markets. However, what really matters now is how markets perform in the future."
Some individuals have income from multiple sources, such as rental income, so may see no benefit in an annuity. Drawdown has risks though, as your pension pot may run out if you withdraw too much and stock market volatility may reduce its value.
Norton says the decision of whether to go with an annuity or income drawdown must be down to the individual.
He says: “Most investor priorities for retirement income are based around peace of mind, maximising what they have, and in some instances, passing wealth on to future generations. Different people will have varying priorities, so there is not a one-size-fits-all approach.
“For the majority of people, however, a degree of certainty around retirement income is key. While some may find the state pension to be sufficient, others might want to top that up with an annuity which would mean they can cover their basic expenses through guaranteed sources, while discretionary spending, gifting, and luxuries could come out of a drawdown pot.”
Pensions and inheritance tax
Pensions will no longer be exempt from an estate for inheritance tax purposes from April 2027. This potentially pushes up the inheritance tax bill for more wealthy individuals. The change means retirees with money they want to pass on may have to reconsider how they do it.
Norton adds: “We would urge investors not to panic and make sudden changes to their retirement plans as a result of the announcements in the Autumn Budget.
The government has not finalised the IHT rules yet and they are not due to come into force until 2027.
"Investors should remember that pensions are primarily a tool for building up an amount of money to fund retirement. Not only are they tax-efficient to contribute to, but once the money is within the pension wrapper it can grow free of income and capital gains tax. Pensions will always be a critical component of a long-term savings plan.”
Should you trust in buy-to-let?
Investing in the property market has traditionally been seen as a viable option for people to fund their retirement. Buy-to-let landlords have benefited from low levels of supply and record high rents in recent years. But rental growth has been slowing amid reduced demand as many tenants are able to afford to get on the property ladder while remaining renters can't afford to pay the high rents.
Many landlords are also exiting the sector due to restrictions on tax reliefs, higher stamp duty and new regulations under the Renters' Rights Bill. Higher buy-to-let mortgage rates may also hit property investing profits.
The key factor, whatever way you are funding your retirement, is planning.
“The plans we build for our clients makes the assumption that the year they retire will be a ‘difficult’ one, i.e. they will retire in the middle of a stock market crash or some other crisis,” says Ross Lacey, director at Fairview Financial Management.
“Using this kind of approach means we have an all-weather strategy for dealing with external factors outside of anybody's control, and our clients have more confidence they can still do what they want.”
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