Five years to retirement: are you ready?
If retirement is on your horizon, you may already have an idea of when you’d like to finish work. Perhaps you’ve started thinking about travelling, spending more time with family or simply having the freedom to choose how you spend your days.
But knowing when you’d like to retire and knowing whether you’re financially ready are two different things.
The five years before retirement can be a valuable time to bring everything together, understand the choices ahead and make sure your plans reflect the life you want to lead.
Start with the retirement you want
Before looking at pension figures, think about what retirement means to you.
Do you want to travel more, move home, help children or grandchildren, or take up interests you’ve not had time for? Perhaps you’d like to work part-time for a while rather than stop altogether.
There isn’t a right or wrong way to retire. The important thing is to have a realistic picture of what you want your life to look like, because that will help you understand the income you’ll need.
It can also be useful to think about how your spending might change. Some costs may fall when you’re no longer working, while others could increase as you have more time for holidays, hobbies and days out.
Understand what income you’ll have
Once you have an idea of the lifestyle you’re planning for, the next step is to understand where your retirement income will come from.
This might include the State Pension, workplace pensions, personal pensions, savings, investments or other sources of income.
If you haven’t already, check your State Pension forecast through GOV.UK. It will show how much you could receive and when you can claim it. It’s also worth gathering your latest pension statements so you can see what your other arrangements might provide.
If you’ve worked for several employers, you may have more than one pension. It’s important to understand what each one offers, including any guarantees or benefits that could be lost if you transfer it. Bringing pensions together can sometimes make them easier to manage, but it isn’t always the best option.
Think about how you’ll use your pensions
Your pension arrangements may offer different ways to take an income.
Some workplace pensions provide a guaranteed income, which may include a tax-free lump sum, based on your salary and how long you’ve worked for your employer. Others give you a pension pot that you can use more flexibly, for example by taking some tax-free cash, drawing an income while the rest remains invested, or using some of it to buy a guaranteed income.
Each option has different implications for your income, tax and the money you have available in the future.
It’s worth understanding these choices before you make a decision. The way you take your pension can affect not only how much you have to spend now, but how well your money supports you throughout retirement.
Look at the bigger picture
Your pensions are only one part of your financial picture.
Think about your mortgage and other borrowing, the savings you’ll want to keep accessible and any investments or other assets you may have. Consider whether you’ll have enough set aside for unexpected costs, as well as the things you’d like to enjoy.
It’s also a good time to review your Will, pension beneficiary nominations and any protection arrangements. These should reflect your current circumstances and the people you want to provide for.
Give yourself time to make informed decisions
You don’t need to have every answer five years before retirement. But understanding where you are now can give you more time and flexibility to make decisions.
At Insight, we believe financial planning should start with what’s important to you. By looking at your plans, income, pensions and wider finances together, your adviser can help you understand the options and how different decisions could affect your future.
Retirement is a big change, but it can also be an exciting one. A little preparation now can help you approach it with a clearer picture of what’s possible.
Not sure whether your retirement plans are on track? Your Insight adviser can help you bring your pensions, savings and wider finances together to see how they could support the retirement you want. Get in touch >
Sources and further reading
FAQ
What should I do five years before retirement?
Start by thinking about the life you want and what it might cost. Gather your pension statements, check your State Pension forecast and review your savings, investments and borrowing. Bringing these together can help you see where you stand and which decisions need attention.
How do I know whether I can afford to retire?
Compare the income you expect from your pensions and other sources with your likely spending. Include everyday bills, the things you want to enjoy and unexpected costs. Your adviser can help you explore how different retirement dates and income choices could affect your plans.
How can I find out what State Pension I might receive?
You can check your State Pension forecast through GOV.UK using the link in the sources above. It shows how much you could receive and when you can claim it, helping you understand how it fits alongside your other retirement income.
Should I combine my pensions before retirement?
Not necessarily. Combining pensions can make them easier to manage, but you could lose valuable guarantees or benefits by transferring. Understand what each pension offers before deciding and speak to your adviser about whether bringing them together is appropriate for you.
What are my options for taking retirement income?
Your options depend on the pensions you have. Some provide a guaranteed income linked to your salary and service. Others offer a pot that may allow flexible withdrawals, some tax-free cash or the purchase of a guaranteed income. Each choice has implications for tax and how your money supports you throughout retirement.
Do I have to stop working completely when I retire?
Retirement does not have to mean stopping work all at once. You might prefer to work part-time for a while rather than finish altogether. Include this in your planning so you can understand how your earnings and other income could support the lifestyle you want.
Disclaimer
This content is for information only. It isn’t personal financial advice. Please speak with us, or another qualified adviser, before making any decisions. Investments may fall as well as rise and you may get back less than you invested. Information was correct at the time of publication.
