UK Pre-Retirement Glide Path (2026/27)

Q What is the bucket strategy?

A way of organising retirement savings by when you will need the money. Bucket 1 (roughly the next 1 to 3 years): cash, so a market fall does not force you to sell investments to pay the bills. Bucket 2 (roughly 3 to 7 years): lower-risk assets such as short-dated bonds, used to refill bucket 1. Bucket 3 (longer term): shares and other growth assets, which have time to recover from falls. Each year you refill the cash bucket, ideally from whichever bucket has done well. How much goes in each depends on your spending and how much risk you can take.

Q What is sequence-of-returns risk?

The risk that markets fall early in retirement, while you are withdrawing money. Selling investments after a fall to fund spending locks in the loss, so two people with the same average return can end up with very different outcomes depending on when the bad years come. Ways to manage it: hold a cash reserve for the first years; reduce investment risk before retirement; buy an annuity with part of the pension to cover essential spending; take less in years when markets fall; or work part-time in early retirement.

Q What is a tax-efficient order to draw on savings?

It depends on your income and plans, but a common approach is: (1) taxable savings and investments - use the £3,000 Capital Gains Tax annual exempt amount, the £500 dividend allowance and the Personal Savings Allowance (£1,000 for basic-rate and £500 for higher-rate taxpayers) each year, because unused allowances are lost; (2) pensions - usually 25% can be taken tax-free and the rest is taxed as income, so drawing just enough to use your Personal Allowance and basic-rate band each year can save tax; (3) ISAs, which are tax-free whenever you draw them. From 6 April 2027 most unused pension funds will count towards your estate for Inheritance Tax (Finance Act 2026 s.66), which removes much of the case for leaving pensions untouched to pass on. Review the order each year.

Q How do I use pension carry forward to catch up?

The annual allowance is £60,000 in 2026/27, and it has been £60,000 in each year since 2023/24 (HMRC), so up to £240,000 of allowance can be available this year if none was used in the previous 3 years. You use this year's allowance first, then unused allowance from the earliest of the 3 previous years. You must have been a member of a registered pension scheme in a year to carry forward from it. If your allowance was tapered in an earlier year, you can only carry forward what was unused of that reduced allowance (PTM055100). Tax relief limit: relief on your own contributions is capped at 100% of your relevant UK earnings for the year (Finance Act 2004 s.190), so carry forward mainly helps if your earnings are high or your employer contributes. Example: someone earning £100,000 who paid £20,000 a year in the last 3 years has £180,000 available. They can get relief on up to £100,000 of personal contributions - enough to recover the £27,432 of Income Tax otherwise due on that salary in England, Wales or Northern Ireland - and the rest of the allowance could only be used by employer contributions.

Q Should I take the 25% tax-free lump sum at retirement?

It depends on what you need. Reasons to take it: a specific use, such as clearing a mortgage or helping family. Reasons to wait: money left in the pension can keep growing free of tax, and you do not have to take the tax-free cash all at once - you can usually take 25% of each amount you draw. The tax-free amount is capped by the lump sum allowance, normally £268,275 across all your pensions (GOV.UK). Do not take cash only to leave it in a low-interest account. From 6 April 2027, most unused pension funds will count towards your estate for Inheritance Tax, so the old argument that pensions always pass on more efficiently than other savings no longer holds; consider getting advice on your own position.

Q What about downsizing?

Selling your main home is usually free of Capital Gains Tax under private residence relief (TCGA 1992 s.222). Moving somewhere cheaper can release money for living costs, gifts or investment, and lower running costs, but buying the new home has Stamp Duty Land Tax (or the Scottish or Welsh equivalent) and moving costs. For Inheritance Tax, the residence nil-rate band applies to a home passed to direct descendants; if you downsize or sell, a "downsizing addition" can preserve it where other assets pass to them instead (IHTA 1984 s.8FA).

Q How do I make the most of the State Pension?

The full new State Pension is £241.30 a week in 2026/27, normally needing 35 qualifying years (and at least 10 for any). Check your forecast at gov.uk/check-state-pension and look for gaps. Voluntary contributions in 2026/27 cost £18.40 a week for Class 3, or £3.65 for Class 2 if you are eligible (for example, self-employed with low profits). A full year of Class 3 costs £956.80 and adds about £6.89 a week (about £359 a year) to the full new State Pension, so it pays for itself in about 2.7 years. You can only pay for the past 6 tax years. If you were contracted out before 6 April 2016, your starting amount may include a deduction for that, so check the forecast carefully. If you defer, you get 1% more for every 9 weeks you delay, just under 5.8% for every 52 weeks (GOV.UK).

Q What about long-term care?

Care costs can be large and are hard to predict, so it is worth planning for them. In England, if your savings are above the upper capital limit of £23,250 you will normally pay the full cost of your care yourself (NHS); the rules are different in Scotland, Wales and Northern Ireland. Options include setting money aside, using the value of your home (councils may offer a deferred payment agreement), or buying an immediate needs annuity when care is needed - payments made from one directly to a care provider or local authority for your care are free of Income Tax (ITTOIA 2005 s.725). Specialist advice is worth paying for here.