Ten things to do before retirement (or risk your pension falling short)

For most of our working life, retirement can feel like a theoretical concept. But if you’ve got five years or less to go until you reach retirement age, it becomes more of a reality.

By that time, your financial position is more certain and any financial forecasts can be more realistic. This is the key time to check that your plans really are on track and make final decisions. 

Here, Telegraph Money explains the important steps to consider.

Five years before retirement

1. Check your state pension entitlement (and fill gaps if appropriate)

Confirm what state pension you will get, and when. The age at which it can be claimed is currently 66, but this is set to gradually rise to 67 between 2026 and 2028. The amount you’re paid is based on your own National Insurance record; it may not be the full rate (currently £10,600 a year), so check yours via the Government Gateway. 

If you have gaps in your National Insurance record, it may be worth paying to fill them – the deadline to do this has been extended to April 2025.

2. Decide whether to use the services of an adviser

Going it alone or using the services of a financial adviser is something you need to think about and plan for a few years before actually retiring. 

Shop around and take your time when it comes to finding an IFA, said Ian Millward of Candid Financial Advice. 

“Avoid anything too complex or someone who tries to blind you with science. You need trust – but that shouldn’t be blind trust – and you need to understand the plan. The relationship should feel collaborative.”

Alternatively, the government-backed agency Pension Wise provides free guidance to people from age 50, to help you understand your retirement options. It will tell you what you “could” do, not what you “should” do. 

3. Review your investments and “lifestyling” options

There is a tendency to reduce investment risk as you approach retirement. So, with just a few years to go, now is a good time to look at where your pensions are invested, and consider if this is the right level of risk for you.

Some pensions have what is known as “lifestyling” built in, where stock market holdings are automatically reduced in favour of things like gilts and cash in the years before your nominated retirement age. 

“That approach worked really poorly for people last year when gilts crashed. And, with more people opting for drawdown in retirement, the notion of moving to bonds at age 55 or 60 can be a flawed one,” said Mr Millward. 

“A couple probably have a life expectancy of over 30 years between them [after reaching retirement age] and need the kind of return only the stock market can provide to give them a secure retirement. It may sound counter intuitive but de-risking into retirement can actually be more risky, as being too cautious can lead to you running out of money in old age.”

Now may also be the time to consolidate your pensions, and have your savings in one place – but only where it makes sense. 

Older schemes sometimes have benefits, such as enhanced levels of tax-free cash, guaranteed annuity rates or some old with-profits contracts providing minimum guaranteed returns. These benefits would be lost on transfer. 

4. Boost pension savings – it’s not too late

Ideally, by this time you’ve saved enough throughout your working life to build a pension pot that can sustain you throughout retirement. However, life can be messy and sometimes it can actually make sense to make larger contributions later in life. 

“Often this will be when children are no longer dependent, the mortgage has been paid off and salary is highest,” said Tom Selby, head of retirement at AJ Bell. 

“This is one reason why annual pension contribution limits need to be high and ‘carry forward rules’ are important – it provides flexibility to make up for lost time.”

For example, let’s take a 60-year-old who earns £70,000, has a pension pot worth £300,000 and is in a company pension scheme which pays a total contribution of 10pc (combining employee contribution, employer contribution and tax relief). 

If they keep making the same contributions until age 67, they could have a pension worth around £456,000, according to calculations from AJ Bell.

This would generate £114,000 of tax-free cash and a £342,000 taxable pot. Assuming just the taxable part is used to provide an income, they’d be looking at a starting income of around £14,800.

But, add £15,000 (inclusive of tax relief) each year for the final five years they’re in work, on top of their usual contributions, and this pot could be worth around £540,000 when they turn 67.

You’re then talking about tax-free cash of £135,000 and a taxable pot worth £405,000 which, using the same assumptions, could provide an income of around £17,600, increasing by 2pc per year, for around 30 years.

Three years before retirement

5. Get a quote for any final salary pensions

Getting accurate information on final salary pensions can be slow and hard to decipher – often telling you what your pension was worth when you left service years ago, but giving little information on what to expect when you need it.

 And don’t assume it will be worth more if you defer taking it. “That can be a false calculation as it ignores the income you would have received in the meantime so do the maths and don’t be shy about taking pensions early if that’s what you need to do,” said Mr Millward.

6. Pay off debt

Clearing debt should be a priority. With mortgage rates currently rising fast, and loans and credit cards also getting more expensive, clearing debt is equivalent to a high and guaranteed net return on your money. There’s also potentially huge emotional comfort to being debt-free.

7. Build up emergency savings

Volatile markets are challenging even with the security of a job behind you, but the stress can escalate exponentially when you don’t have that security and, instead of paying in, are now drawing from your pension. 

“Investment returns are notoriously unreliable, so always assume your first year of retirement will coincide with a stock market crash and plan accordingly,” said Mr Millward. “What that really means is: keep a healthy cash float.”

You may want to have 12 to 18 months’ expenses in an emergency fund you can freely access, though there is no set figure for this – it really boils down to what you need to buy you peace of mind. 

One year before retirement

8. Review your outgoings

Costs often fall significantly in retirement. Scrutinise your essential outgoings to try and work out how much you might need each month. It’s also a good time to review costs like insurances and utility suppliers to try to reduce prices where you can. 

9. Decide on pension options, including deferring your state pension

At this point you’ll be making final decisions about entering drawdown, buying an annuity or taking ad-hoc lump sums from your pension pot.

“The attractiveness of the different options may have shifted. For example, recent rises in interest rates have also boosted annuity rates, so have boosted the attractiveness of annuities as a retirement option,” said Alistair McQueen, head of savings and retirement at Aviva.

When it comes to drawdown, a good rule of thumb on how much you can draw from your pensions and maintain the real value of the capital, is generally regarded as around 4pc a year. Many now question whether that figure is still sustainable due to poor returns on bonds, but also indifferent stock market returns over the last two or three years. 

The real differentiator here is charges, with most financial advisers charging around 2pc a year, said Mr Millward: “This is an enormous bite out of anyone’s savings.” 

“If you are taking 4pc you need total returns above 6pc a year before you even start protecting the value of your money against inflation,” he added. 

“With that level of charges, 3.5pc or even 3pc might be a more realistic withdrawal level. But if you can get total charges down to around 1pc, then 4pc is probably still a realistic starting assumption – and a healthy pay rise for you.”

It’s also possible to defer your state pension in return for a higher guaranteed income. Whether or not this is sensible will depend on several factors, including your health, income sources and spending needs.

10. Factor in the tax issues of part-time working 

Deciding when and how to stop working is a deeply personal decision and one of the biggest transitions in our life. Many people ease their way into retirement by reducing their working hours over time and, in parallel, gradually increasing their pension withdrawals.

Be aware that there will be tax implications if you work while drawing a pension.

The first 25pc of a pension can be taken as a tax-free lump sum, while the rest is viewed as taxable income and subject to income tax.

When added to your other income in the tax year you may be pushed into a higher tax bracket – likely if you take a large amount from your pension in one go.

Once you start withdrawing money from your pension then the money purchase annual allowance (MPAA) kicks in. This limits the amount of money you can contribute into your pension to £10,000 each tax year.