If you’ve got five years or less to go until you hope to retire, there are certain steps you might want to think about taking now to ensure your retirement plans are on the right track.
After all, no-one wants to finish work without a clear idea of how much income they’re likely to have, or to suddenly find out that they don’t have enough money to enjoy the sort of retirement they’d hoped for.
Here, we look at some of the things you need to consider if you’re on the final countdown to retirement, and where to go for more help.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Getting ready for retirement
Your first step if you’re approaching retirement should be to think about how much income you’re likely to need when you stop working.
Many people’s outgoings fall when they retire because they no longer have travel costs to factor in, or because they may have finished paying off their mortgage at that point. It’s a good idea to write down what your monthly essential costs are likely to be, and also how much additional income you think you’ll need for non-essentials such as holidays and eating out.
As a general rule, experts suggest you’ll typically need around two-thirds of your final salary at retirement after tax to maintain your current lifestyle when you stop working, but this will very much depend on your individual circumstances.
You can find out more about whether you’re likely to have enough to live on in retirement in our guide Can you afford to retire?
Do you plan to downsize?
People often think about downsizing in retirement, especially if they want a property or garden that will be more manageable as they get older, or simply to free up some money to help cover their living expenses.
If you’re considering downsizing, this could have a big impact on your retirement finances, so it’s worth thinking about what stage you plan to do this and what your objectives are. You need to be realistic about whether or not it will work for you too. Often, for example, people want to stay in the same area they’re currently living in, but may not have many properties to choose from. You can find out more about the pros and cons of downsizing in our guide Five questions to ask yourself if you’re considering downsizing your home.
Where is your pension invested?
By the time you reach your 60s, you might be thinking about ensuring your pension savings are more conservatively invested to protect you from any sudden market falls just before you retire.
Many company schemes automatically move your funds into lower risk investments as you approach retirement, through a process known as ‘lifestyling’. This essentially means your pension portfolio is gradually switched out of typically more volatile assets such as shares and into a mixture of ‘steadier’ assets such as bonds and cash. If you’re not sure whether your plan does this, check with your employer or pension provider.
Even if you’re managing your own pension, say via a self-invested personal pension (a SIPP), you can do your own ‘lifestyling’. Everyone’s needs and circumstances will be different but as an example, if you’re five years away from retirement and have 50% of your pension invested in shares and 50% in bonds and cash, you could move 10% out of stocks and shares and into cash each year, reducing the chances of your portfolio taking a hit as a result of any market shocks.
This approach is normally used where it is intended that an annuity would be purchased. If you want to remain invested and draw an income from your portfolio, you may want to leave a higher proportion of your pension savings in shares. Find out more in our guides How much cash should you hold in your pension? and Where is my pension invested?
How do you plan to take an income from your pension?
As well as thinking about ways you might be able to reduce risk, when you’re in your 60s, you’re also likely to be focused on how you’ll use your retirement savings to provide you with an income when you stop working.
You’re currently able to start taking money from your pension from as early as the age of 55 (rising to 57 from 2028), although you’ll need to check your particular plan’s rules. You can take up to 25% from your pension tax-free and can then use the remainder of your pension pot to secure an income, with most savers either opting for an annuity, or income drawdown.
Income drawdown allows your pension fund to remain invested whilst you draw an income from the fund, enabling you to remain in control of the investments, albeit there’s still a risk they could fall in value.
When you buy an annuity, you’re essentially entering into a contract with an insurer whereby in exchange for your pension pot, it will provide you with a guaranteed income for the rest of your life, or for a defined period, depending on which type you buy Learn more about your options at retirement in our guide Your pension options at retirement.
If you plan to swap your nest-egg for an annuity, it’s important that you shop around for the best deal, as you don’t have to take the annuity your pension provider offers you.
On the other hand, if you’re planning to opt for an income drawdown plan and remain invested, think very carefully about how much income you’ll need to draw, because if you draw too much and/or if markets take a tumble you risk running out of money – and it’s very likely you’ll need that money to see you though the next few decades. Find out more in our article What income could a pension worth £100,000, £150,000 and £500,000 give you?
Can you boost your pension contributions?
If you’re worried about not having enough saved for the future and you can afford to, you may want to consider making additional lump sum contributions into your pension in the run up to retirement. The reason it makes sense to save as much as possible into your pension as you can is that you’ll benefit from tax relief on your contributions, right up until you reach the age of 75.
Most UK taxpayers automatically get tax relief on pension contributions at the 20% basic rate of tax That means if you wanted to add £100 to your pension, you’d only need to pay in £80, as the government would prove £20 in tax relief.
If you’re a higher rate taxpayer who pays income tax at a rate of 40%, you can claim even more pension tax relief back, so paying £100 into your pension will cost you just £60. You’ll usually get 20% of this back automatically and then will have to claim the remaining 20% through your tax return or by calling HMRC.
The same goes if you’re an additional rate taxpayer, except you can claim an additional 25% on top of the usual 20%, giving you total pension tax relief of 45%. Learn more in our article How pension tax relief works.
The consumer association Which? has a useful pension tax relief calculator which can give you an idea of how much tax relief you’ll get on your pension contributions.
Bear in mind, however, that there’s an annual pension savings limit known as the Annual Allowance, which for most people in the 2024/25 tax year is £60,000, or the value of your whole earnings, whichever is less.
Your Annual Allowance reduces if you’re on a very high income. If your income added to any pension contributions you or your employer make (known as your ‘adjusted income’) is higher than £260,000, then for every £2 it goes over this limit, your Annual Allowance goes down by £1. The minimum reduced Annual Allowance you can have is £10,000. You can find out more about pension allowances in our guide How do pension allowances work?
If you’ve used your full allowance in the current tax year but not in the recent years before this you may, depending on your circumstances, be able to carry forward any annual allowance that you haven’t previously used. You do, however, need to have been a member of a pension scheme over that period. You can learn more about this in our guide Pension carry forward explained.
Have you checked your State Pension entitlement?
Your State Pension is likely to make up a significant proportion of your retirement income, so it’s worth checking how much you’re likely to receive once you reach State Pension retirement age.
You can get a State Pension forecast online via the government’s ‘Check your State Pension forecast’ site. You’ll first need to set up an account with Government Gateway, if you don’t already have one. You must provide your name, date of birth, National Insurance number and email address to this, and you’ll then receive a user ID and can create a password. You’ll also need to confirm your identity by submitting details, such as your passport number, or information that can be found on your payslip or latest P60.
Make sure you’ve located all your pensions
If you’ve worked for lots of different companies over the years, you might have paid into several pensions. If you’re finding it difficult to keep track of them all, it might be worth consolidating them into one through a personal pension. You can find out more about this in our article Should I consolidate my pensions? Before you do this, however, you’ll need to make sure you’ve found any pensions you might be missing, and check you won’t lose out on any benefits or have to pay steep charges to move them.
For example, if you’re considering transferring from a final salary pension, the benefits at risk could include things like a retirement income related to salary during employment, which is likely to be better than the income generated by a defined contribution scheme, so it’s unlikely to be the right option. Read more in our guide Should I transfer my final salary pension?
You can use the Government’s Pension Tracing Service (telephone 0800 731 0193) to find any old pensions you might have lost track of. You’ll need the name of an employer or pension provider you think you have a pension with to use the service. The service won’t, however, be able to tell you whether you have a pension, or what its current value is.
Seek advice
If you are aged 50 or over and have a defined contribution pension, you can book a free telephone or face to face appointment with the Government’s free Pension Wise service, to help you make sense of your options. This is almost always worth doing as a free starting point to help you on your way.
It may also make sense to consider using a financial advisor who can offer you more personalised support and recommendations, and help you plan for your retirement. Learn more about when you might need advice on your pension in our guide When should I get pension advice?
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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