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.
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.
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 might 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 might be a good idea to take financial advice about the best option for you.
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.
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.
Use our Budget Planner to look at your spending.
Work-related costs (such as travel to work, lunch, work clothes) will fall, and you might have paid off many of your debts (see below).
But your spending might go up in other areas, such as heating, leisure and healthcare.
To prepare yourself for these changes:
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.
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.
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 might be able to do this earlier if you’re in very poor health).
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 might be able to transfer it but you have to take independent advice and it’s normally not in your interests to transfer.
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 directoryopens in new window.
Find out more about your options with our Retirement income options tool.