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How to plan for your retirement

Planning for retirement starts from saving into your pension and comparing investments to build a pension pot. As retirement approaches you’ll need to understand your options for using pension drawdown, buying an annuity, accessing equity in your home and the tax implications of these choices.


Why planning for retirement is important

Planning for retirement is important because failing to do so could mean you face financial difficulty when you leave the world of work. It’s vital to consider how you’ll replace your previous earnings, and although you’re unlikely to be able to maintain that same level of income, you’ll want to make sure you’ve got enough for a comfortable standard of living.

It’s advisable that you aim to have several income streams for when you are finally able to give up work. Ideally you should aim to have a substantial pension pot, together with independent savings and investments, as well as other assets that can all be used to provide a retirement income. This all needs a lot of planning to ensure you’re building up the required sums; leaving it too late means you run the risk of not being able to save enough, which is why starting early is essential.

When to start preparing for retirement

It’s never too early to start preparing for retirement. Really, it should be a consideration from when you have your very first job – enrolling onto the company’s pension scheme is a vital first step, and from then on it’s important to keep track of your contributions and overall pot so you know whether you’re on track for the retirement you want.

However, the closer you get to retirement age, the more attention you need to give it. You’ll need a clear overview of your current pension savings and an idea of what you’ll do with your pot when you retire – will you opt for an annuity, for example, or is income drawdown your preferred method of securing a retirement income? Are you considering equity release in order to boost your cash reserves, or perhaps you want a retirement interest-only mortgage to repay an existing commitment?

Whatever option you’re considering, having the right support is key. Before creating a retirement plan it is advisable to speak to an independent financial adviser who will be able to give you impartial advice about what would suit your personal circumstances, but you’ll also want to familiarise yourself with the options available.

We’re here to help, so read on for more information, or visit our retirement guides section to find out more about pensions, equity release and annuities.


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How to prepare for retirement

Preparing for retirement all comes down to saving enough to ensure you’ll have a sustainable income. To do that you should first find out how much you’ll need to live on – there are a lot of retirement income calculators available to help – and from there you can start setting savings goals to ensure you’ll be able to build a suitable pot during your working life.

When it comes to where to save, ideally, you’ll want to save into a pension – making sure to benefit from employer contributions and tax relief – but you may like to consider alternative options such as stocks & shares ISAs as well.

After that, it’s time to get saving! Saving as much as possible from as early as you can will always be preferable, but of course other priorities (such as paying off student debt, getting onto the property ladder and having children) may take precedence in your earlier decades. Nonetheless, funnelling as much as you can into your pension will pay off in the long run, and in your younger years, you can take a bit more risk in terms of your investments as well.

You’ll want to regularly check the investment performance of your pensions to ensure your money is working as hard as possible. And, if you’ve accumulated several pension pots over the course of your career, it may be worth consolidating them to keep things simple. Just make sure to seek the right advice to ensure it’s the right decision for you.

Your strategies for retirement planning will change the closer you get to leaving work, with the final few years in the workplace arguably the most important when it comes to getting prepared.


Five years from retiring – what steps should you take?

Now’s the time you can really start thinking about retiring – and whether or not your pension savings will allow it. You should start by getting a state pension forecast so you’ll know when you can receive a base level of income and from which date, and from then you can start making decisions about when to access your personal or private pensions. You can currently start drawing a personal pension from the age of 55, though remember that the earlier you start, the longer the funds will have to last.

You should use a pension calculator to see how much of an income your private pensions will provide, and you may want to increase your pension contributions in the last few years if your income will allow. Now’s the time to trace any old pensions that may have slipped by the wayside – the Government has a handy pension tracing tool to help – and you’ll also want to make sure your debts are paid off so they won’t be hanging over you in retirement (and if you’ve got a mortgage you don’t think will be repaid in time, start thinking about options such as retirement interest-only mortgages or equity release).

This is also the time when professional advice can come into its own. You’ll not only need to make sure that you’ve got enough saved, but you’ll want to start considering ways to turn your pension pot into an income, and seeking an independent adviser can be invaluable in your decision-making process.

Tax considerations when preparing for retirement

There are a lot of tax considerations to think about when planning for retirement, including how to ensure you’re saving in the most tax-efficient manner (ideally through making the most of tax relief in a workplace pension, and/or utilising an ISA), as well as the tax implications of withdrawing your eventual pension income.

You’re free to withdraw 25% of your pension savings as a tax-free lump sum, after which any further withdrawals over your annual income tax allowance (either via drawdown or an annuity) will be taxed at your nominal rate. The exception to this is if you choose to forego the lump sum and instead want to use your pension savings more like a bank account, in which case 75% of each withdrawal will be taxable with the other 25% being tax free. Taxation can be a bit of a minefield, so again, seeking advice is key.

What else to consider when planning for retirement

Start a pension

Although there are several ways to put money aside for retirement, one of the best – and most tax-efficient – is to start a pension. This can either be through your workplace pension scheme or, if you’re self-employed or don’t qualify for any other reason, you can look into arranging a private pension yourself. 

Find out more about how pensions work.

Is a self-invested personal pension for you?

For those who want to go down the private pension route, a SIPP (self-invested personal pension) could be your first port of call. A SIPP lets you choose how and where your pension funds are invested, giving you more control over your financial future, with tax relief and similar benefits remaining the same. 

Moneyfacts has reviewed the best SIPPs available and awarded the best five-stars.

Use life stage investment planning

Your financial goals – and in turn, your investments – will change depending on the stage of life you’re in, with someone in their 20s having very different needs to someone in their 40s, 50s or 60s. This means any investment plan needs to be tailored accordingly, while at the same time ensuring your long-term goals are kept in mind.

Speak to an independent financial advisor and start your retirement plan today.

Should you buy a guaranteed pension income with an annuity?

When it’s time to think about how to spend your pension pot, an annuity will likely be one of your options. This is where you use your funds to “buy” a guaranteed retirement income, with the rate set at the outset. You might decide to use your whole pot for this purpose (after taking the tax-free lump sum), or you might only use a portion of your funds to buy an annuity and will keep the remainder invested. It’s a huge decision as, once an annuity is purchased, it normally can’t be reversed, so it’s vital to make sure it’s the right choice for you.

Compare the best annuity rates.

Should you use income or pension drawdown?

Income drawdown or pension drawdown is another option for spending your pension pot, whereby you keep the funds invested and withdraw smaller amounts at intervals that suit you. This gives you an income that will be taxed at your nominal tax rate, with it offering a heightened level of flexibility as you’re in complete control. However, because there are no limits on the amount you can withdraw from your pot, there’s the risk that you could spend it all too soon, so seeking advice is key.

Read more about how pension drawdown works.

Find out where to get pension advice

Read our guide to find out how and where to get advice about your pension.

Is releasing equity from your property right for you?

Equity release could be an option for those who have built up a lot of equity in their home and want to release some of that money to help fund their retirement. It’s essentially a lifetime mortgage, but the borrower doesn’t have to make any repayments in their lifetime; instead, interest rolls up and the loan is repaid when the borrower either dies or goes into long-term care and the house is subsequently sold.

Find out more about how equity release works.

Tax and estate planning

Tax and estate planning should be a vital part of any financial plan, particularly for those with a significant estate who want to maximise the amount they can pass on to loved ones. It involves ensuring you’re able to pass on your assets in the most effective and tax-efficient way, and getting the right advice is essential to the process.

Find an independent financial adviser. 

How to pay for your funeral

It’s never nice to think about, but planning how your loved ones will pay for your funeral can go a long way to reducing some of their financial stress when the time comes. Many people like to incorporate funeral planning into their overall retirement plan, either through buying a funeral plan directly or planning to leave behind funds in a different way. 

Compare the best funeral plans.

What are some of the risks when planning for retirement?

In the ideal world your hard work during your working life culminates in assets and savings that can be used to fund a comfortable and enjoyable retirement. Unfortunately, real life isn’t the ideal world, and while having a large pension pot and a number of assets will help towards funding a financially stress-free retirement, there are a number of risk factors that can impact your savings and assets and result in making your retirement not as comfortable as you initially imagined. Fortunately, these risks can be prepared for and, as such, can be avoided – or at least mitigated.

We've summarised some of the risks when planning for retirement:

Longevity risk in retirement

Living a long and healthy life is most people’s retirement goal, but when it comes to finances it can put stress on your savings. Research by Retirement Advantage published in November 2017 found that over three quarters of over 50s underestimate how long they will live, with men underestimating on average by six years and women by eight years. If you do underestimate your life expectancy it will often result in your pension fund starting to run low and you may have to start having to use money or assets that you had hoped to leave as inheritance. To avoid this risk, when saving for retirement it is better to plan to have more money than you expect to need so that even if you end up living beyond 100 you will still have enough money.

It should also be noted that while you may receive the State Pension for your entire lifetime (as long as you are eligible to receive the pension) the amount you get each month will unlikely be enough to fund a comfortable lifestyle – but it will provide an additional income source that will need to be backed-up by your own private means. Your entitlement to the State Pension will depend on how many years National Insurance contributions you’ve made, for example to get the full State Pension you will need to have made 35 years of National Insurance contributions, while to get any State Pension at all you will need to have 10 qualifying years on your National Insurance record. If you think it is unlikely that you will get the full State Pension it is even more important that you factor in the longevity risk in your retirement, this is because you will be receiving less from your State Pension which means that your savings could run out quicker than if you were on a full State Pension.

Investment risk in retirement

When saving for retirement you will likely to choose a pension as part of your savings plan, but with all pensions schemes there is an element of risk involved. All pension schemes work by investing the money you contribute into your pension, often this is a good thing as long-term investments will normally result in you gaining money on the amount you contribute, however all investments are risky so there is always the possibility of your pension not making the gains you expected or, in the worse case scenario, actually losing money. To help reduce the risks involved with your investment it is essential that you continuously monitor how your investments are performing – currently all pension schemes should provide you with the ability to do this and to move money from investments that are not performing as well as you expected. As well as this, when you get closer to your planned retirement age it is usually advisable that you move your pension savings from higher risk investments to those that may provide a lower return but which are a safer investment to help protect your pension from losing money that you won’t have time to make back.

Inflation risk in retirement

If you are on a fixed retirement income the rate of inflation could see you getting less for your money, especially if the economy goes through a period of high inflation. While the State Pension may rise to help pensioners cope with the rate of inflation, any fixed pension will normally stay the same. While you won’t have direct control over inflation there are some ways to help it have less of an impact on your retirement income. A good idea is to have a number of sources of income for your retirement, including pensions and savings. Having money in a savings account that matches or beats the rate of inflation will mean that even a decade or more after retiring your savings will have retained its value. Normally the best saving rates are available on accounts which require you depositing your money for a fixed number of years, such as fixed-rate bonds, so it is important to keep this in mind if you are planning on using savings accounts as part of your financial retirement plan.

Annuity risk in retirement

An annuity is a popular way of ensuring you have a steady income for your lifetime, however even annuities are not without risk. Annuities work by being bought using the money saved in a pension upon your retirement and then will give you an income for life. The biggest risk with an annuity is that upon the time of your retirement there are poor annuity rates available. The only way to get the best possible deal with your annuity is to look around and get independent financial advice before making a decision. Another risk with annuities is that if you choose a fixed income your payments are impacted by inflation. There is the option of an increasing income annuity which will help protect your income from inflation by either increasing each year by a set amount, for example 3%, or provide you with an income that is adjusted yearly in line with inflation.

Retirement planning FAQs

When can I retire?

The state retirement age for men and women increased from 65 to 66 on 6 October 2020. It is then scheduled to increase to 67 in 2028. The government intends to increase this again to 68 between 2037 and 2039 - however these are awaiting approval from parliament.
Find out more about when you can access your private or workplace pension.

What is retirement age?

These days, retirement age tends to be different for everyone, and will often come down to when you can afford to retire. Those who have a significant personal pension might like to retire as soon as they can access those funds – which is currently 55 – while others will need to rely more heavily on the state pension, in which case they’ll need to wait until at least the age of 66. It’s a wholly personal decision, but seeking the right advice beforehand, together with having a robust financial plan in place, can help ensure you’re able to retire when you’re want to. Read our guide on when you can retire for more.

What risks do I need to think about?

There are a lot of risks you’ll need to consider when planning for retirement, from longevity risk – the risk of living longer than your savings will last – to investment risk if you keep your pension invested, and it’s vital to understand those risks so you can mitigate them accordingly. You can find out more by reading our guide on retirement planning risks.

How much do you need to retire?

This will likely depend on your expectations; someone who wants to maintain the same standard of living as they had in their working life will need to ensure their pension pot has the funds to suit, and likewise, someone who fully expects to rein in the spending a bit may not need such a significant sum. Yet this will also depend on things like whether you’ll still have a mortgage to pay in retirement; it’s important to plan ahead, taking care to calculate all of your expected retirement outgoings, so you can determine how much you’ll need to live off and make the necessary investments accordingly.

How long will £1m last in retirement?

It all depends on how quickly you’ll spend it! According to the Pensions and Lifetime Savings Association, someone who hopes to have a “comfortable lifestyle” in retirement, where they could be spontaneous with their money and enjoy two overseas holidays a year, would need something in the region of £1.1m in their pension pot (which would equate to around £33,000 per year over a typical retirement). So, £1m could theoretically last for the whole of your retirement, provided you don’t spend more than around £30,000 a year.


This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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