Checklist – preparing for retirement
It pays to be prepared as retirement nears. Around two years before you want to stop working is a good time to start thinking about your retirement options and the choices you’ll need to make. Consider getting financial advice because these are decisions that can shape your income for the rest of your life. Our checklist helps you make sure you’re ready for retirement.
Work out your likely retirement income
Your starting point is to work out how much you are likely to have in retirement. You should do this about two years before you retire. This involves:
- Getting a State Pension statement. If you haven’t recently received a State Pension statement, it’s a good idea to get one. This will give you an estimate of how much State Pension you may receive, based on your National Insurance contributions so far. You can do this at the GOV.UK website.
- Finding out how much you might get from your defined benefit pension. Every year you’ll be sent a statement showing you how much pension you’ve built up so far and how much you may get when you retire. Find the most recent one or ask for a new statement if it’s out of date.
- Adding up the savings and investments that you could use for your retirement. A pension is a good way to save for your retirement but you may also have other savings or investments that you could use to increase your income when you retire.
- Tracing any lost pensions. If you’ve lost track of any old pensions, the Pension Tracing Service can help you find them. This is a free service run by the Government – don’t confuse it with commercial services that have a similar name but charge a fee.
You can use our Pension calculator to help you work out what you might have to retire on.
Don’t take risks with the pension savings you’ve built up
If you have a personal, stakeholder or workplace ‘defined contribution’ pension (where you build up a pension pot), then some or all of your money is likely to be invested in funds. As you approach retirement, it may make sense to gradually move your money to lower-risk investments.
This process should be carried out in the last 10 or so years before you retire. Some pension funds do this automatically, while others do not. It may be a good idea to take financial advice about the best option for you.
Consider ways to boost your pension
If you’re getting close to retirement and the amount you’re likely to retire on is less than you’d hoped, the scope for making major changes to boost your pension pot is limited. But there are still things you can do to make the most of the time that remains before you retire.
Two key ways of increasing your pension pot are to pay more into it and put back the date at which you start taking money from it. This allows you to increase the amount you’ll have to retire on and decrease the amount required due to having a shorter overall retirement.
Budget for changes in your day-to-day spending after you retire
You’ll probably need to get used to a different pattern of income and spending when you retire. You’re likely to have less money to live on. Work-related costs (such as travel to work, lunch, work clothes) will fall, and you may have paid off many of your debts (see below). But your spending may go up in other areas, such as heating, leisure and healthcare.
To prepare yourself for these changes:
- Draw up a budget to look at where your income comes from and how you spend it now.
- Think about what changes you might need to make to live comfortably in the years ahead.
Use our Budget Planner to look at your spending.
Clear your debts before you retire
You should normally try to start your retirement as free of debt as possible. Your income is likely to go down when you retire, so any fixed repayments will take up a bigger share of it.
- Add up how much you owe (on your credit card, any personal loans and your mortgage, if you have one).
- Check the interest rate you’re paying on each debt.
- If you have money to spare, pay off the debt that charges the highest interest rate first. This is the most efficient way to clear your debts.
Many people use their pension tax-free cash lump sum to clear debts such as their mortgage or loans. However, if you belong to a defined benefit (salary-related) pension scheme, taking a lump-sum payment can be expensive compared to the amount of pension income you must give up in return.
In this case, it might be better value not to take the lump sum and instead repay any debts out of your higher pension income. If you’re not sure which option is best for you, get professional advice.
Decide when to start taking your pension
You need to set a target date when you want to start drawing an income from your pension. You don’t have to stop working to take your pension, but you must be aged at least 55 (you may be able to do this earlier if you’re in very poor health).
- Check with your pension scheme provider when you said you wanted to start taking your pension.
- Think about how you want to take money from your pension, if it’s a defined contribution pension scheme. The new pension rules mean you can take money out of it however you like. Find out more information in our guide Understanding your pension pot options.
If you have a public sector salary-related (defined benefit) pension you generally cannot transfer it in order to take money out of it directly. If you’re in a private sector salary-related pension you may be able to transfer it but you have to take independent advice and it’s normally not in your interests to transfer.
- Get advice or guidance on your options. You can receive financial advice (which you will have to pay for). You are also entitled to free pensions guidance through a government initiative called Pension Wise. You can get this guidance online, over the phone or face-to-face. Find out more on the GOV.UK website.
- You can defer (delay) taking your State Pension and receive a higher amount when you do start. At the moment, you can choose to take either a higher weekly amount or a lump sum (if you defer by at least a year). However, from April 2016 you will only be able to get a higher weekly amount.
- Ask your workplace or personal pension scheme provider(s) if you can delay taking your private or workplace pensions and if there would be any additional charges if you did this.
Get advice and finalise your choice
If you can’t afford to delay taking your pension, talk through the options with a financial adviser.
To understand the choices for using your pension pot, use Pension Wise – the free and impartial service backed by government. Find out more from pensionwise.gov.uk.
However, this guidance won’t tell you the best option for you at retirement, only what the options are. If you want advice about what you should do, talk to a financial adviser.
You can find FCA registered financial advisers who specialise in retirement planning in our Retirement adviser directory.
Find out more about your options with our Retirement income options tool.