Approaching retirement? Here’s what you need to consider

Several research studies show that most people are not saving enough for a comfortable retirement and stress that the earlier you start saving the better, if you want to build a decent pension pot.

But when you get to within five years of retirement, it can start to focus your mind even more. Hopefully, you will have been saving diligently into a pension throughout your working life, but many fear, rightly, that they could well end up with insufficient savings in their pension pot to ensure the retirement lifestyle they desire.

So, with time running out to get your finances in shape, here’s six things you need to consider in the run up to your retirement.

1) Firm up your retirement plans

With retirement approaching, you should by now have a pretty clear idea about how you’d like to spend your golden years. However, now is the time to properly refine your goals.

These include being clear about the age that you plan to stop working, and whether you intend to stop completely or continue to work part-time in some capacity and phase into retirement. You also need to decide what you want from your comfortable retirement and from that work out how much income you’ll need achieve to this.

2) Will your savings generate the retirement income you need?

When you are around five years from retirement, and you’ve firmed up your retirement plans, it’s important to know that your savings are on track to generate the income you’ll need. If not, then there’s still time to do something about it.

Remember, whilst your pension pot is likely to be the biggest part of your retirement portfolio, your retirement income could possibly come from many sources – your pension, the state pension, ISAs, general investment accounts, second homes and business assets.

Cashflow planning can help you with this process, by giving you a guide to the possible outcomes of your plans and financial situation, and by recommending steps to correct any potential shortfalls. For help with this, simply get in touch.

3) Consider boosting your savings

With five years to go to retirement, there’s still plenty of time to boost your pension pot, so if you have any surplus income or savings, consider increasing your monthly pension contribution or pay in lump sums.

Most people can pay the lower of £60,000 or 100% of earnings into a pension every year and get tax relief at their marginal rate – either 20%, 40% or 45%. Your money grows tax-free, too. However, if you have already started to draw from your pensions, you might be restricted to £10,000 a year.

But if you haven’t used all your annual pension allowance from the previous three years, you could pay in more. Carry-forward rules enable you to do this, although the 100% of earnings cap still applies.

Remember too that it’s not just pensions that can provide you with income in later life. ISAs can prove a very useful addition and whilst you don’t get tax relief on what you pay in, there’s no tax on any growth or income when you come to withdraw it. The £20,000 annual allowance means you have plenty of scope to save more between now and retirement.

4) Reduce your debts

On the other side of the equation, you need to look at your borrowings. Ideally, you will reach your retirement with no outstanding mortgage or other debt but in reality, that may not happen.

So a key decision for some savers is whether to use any surplus cash or income to clear debt early or boost your pension savings. This will depend on factors such as the tax rate you pay (pensions are particularly attractive to 40% and 45% taxpayers), your mortgage rate, early repayment charges, and the size of your retirement savings.

5) Take care when accessing pensions early

One way to pay off any expensive or large debts as you approach retirement is to opt for early pension withdrawals. Under current rules, most pensions can be accessed at age 55, rising to 57 in 2028.

The number of people doing so has reached a post-pandemic high, reflecting a significant shift in retirement planning. According to an article in MoneyWeek, this trend is expected to continue, potentially placing greater strain on individuals’ financial security during retirement.

There may be good reasons to do so, but many people are withdrawing too much – and too early. People are living longer than ever so funding a retirement has never been more expensive – money withdrawn early will need replacing. Decisions made at 55 can have serious implications when you’re in your 80s.

There are three things to remember if you are thinking of accessing your pension early. Firstly, withdrawing too much too soon significantly increases the likelihood of running out of funds. Secondly, it means missing out on potential investment growth.

Thirdly, you need to avoid triggering the Money Purchase Annual Allowance (MPAA), as this will have a severe impact on your ability to save tax efficiently in a pension in the future. The maximum amount you can stick into a pension every year and get tax relief falls to £10,000, and you can no longer use carry forward relief – restricting the options to boost your savings as retirement draws closer.

So if you are struggling to make ends meet or want to reduce your debts, and your pension is the only asset available to support you, consider just taking your tax-free cash (or a portion of it) as this won’t trigger the MPAA.

6) Review your asset allocations

As you approach retirement, it’s generally a good idea to start reducing the level of risk in your investment portfolio. This is because the closer you get to retirement, the less time you have to recover from potential stock market downturns, which could significantly impact your savings. This usually involves gradually switching from riskier assets such as shares into safer ones like bonds and cash.

However, this may also depend on what you plan to do with your pension pot on retirement. If you plan to keep your money invested and rely on income drawdown to draw income flexibly, then derisking may not make sense.

However, if you are looking to buy an annuity – a guaranteed income for life or for a set period – immediately at retirement, you will want to avoid the risk of a market slump before your retirement date and so should consider switching some of your pension pot into safer assets.

There’s no right or wrong way to do this and will depend on your personal goals and circumstances. For financial advice and guidance at this point, it might pay to contact your financial adviser.

7) The next step

Having saved for your retirement throughout your working life, it’s important not to make mistakes in the final years as your retirement date approaches.

The above article outlines some of things you need to consider. If you feel you would benefit from discussing your financial situation and plans with a financial adviser, please do not hesitate to contact us. We can work with you to help provide a sharper focus and to get your finances in the best possible shape for your golden years.

Please note 

This article isn’t personal advice. If you’re not sure whether an investment is right for you, please seek advice.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

You should seek advice from your financial adviser to understand your options at retirement.

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