Fourteen things to do in the five years before retirement

Large numbers of people approaching retirement remain hazy about how they will pay for it, with four people out of five of those aged between 55 and 64 not knowing how much they have saved in their pension, according to research from Standard Life.

The good news is that, if you’re willing to act, there are ways to improve your situation no matter how late you leave it – but the sooner you take action, the better the outcome. That’s what we’re here to address in this article, which counts down the 14 steps you need to take as you approach retirement.

They begin with what to do when you’re five years away from retirement, then three years away, and then what to do when you’re just 12 months away.

In this article, we cover:

• What should I do five years before retirement?
• What should I do three years before retirement?
• What should I do one year before retirement?

Read more: Best ready-made personal pensions

What to do five years before retirement

Five years before retirement is a good time to check that your plans are on track. Rebecca Goodman explains how to get started.

1. Confirm your state pension (and top up if necessary)

You can check your state pension entitlement via the Government Gateway at gov.uk. The full state pension is £221.20 a week (or £11,502.40 a year), which you can get from the state pension age of 66, although this is set to rise to 67 between 2026 and 2028.

To get the full amount, you’ll need 35 years of national insurance (NI) contributions.

If you have any gaps in your record where you weren’t working, but you were receiving benefits or looking after children or grandchildren, you may be able to claim free credits that can go towards your NI record.

It’s possible to pay voluntary contributions to fill other gaps and you can usually do this for the previous six years. However, at the moment the government is allowing people to pay for gaps on their record all the way back to April 2006, which is a unique window of opportunity to plug up to 17 years of missed NI contributions in one go.

This will end on April 5, 2025, so consider whether it is something worthwhile for you.

2. Check for missing pensions

There are about 2.8 million lost pension pots, worth a total of £26.6 billion, according to the Pensions Policy Institute.

If you’ve changed jobs several times over your career, you may have lots of different pots from separate employers. If you have any old paperwork from the pension provider, such as an annual statement, this should have the details on it.

If not, you should try contacting your old employer. If this is not possible or you’re not getting anywhere, you can contact the Pension Tracing Service, which is a free government database of private pension schemes. They will be able to tell you which scheme your employer was using and who to contact.

3. Do you want to use an independent financial adviser?

An independent financial adviser (IFA) is an option many people choose. Not only can they look at your pension forecasts, calculate how much money you will need for your ideal retirement and give advice on how to reach that amount, but they can also manage your portfolio once you have retired.

If you do want someone to manage your portfolio, you’ll have to pay either a fixed fee or a percentage of your assets so you should take some time to shop around and decide who to sign up with.

Helena Wardle, founder of the digital financial planning tool Money Means, said: “Find someone good to work with as it is important that you feel comfortable that you can talk to them openly, that they make an effort to help you understand clearly, that they listen and try to understand your perspectives, objectives and challenges and that they are transparent on charges.”

You can find an IFA through word of mouth or on review sites such as Unbiased and VouchedFor.

4. Consolidate

If you haven’t already done this, consolidating several pension schemes may make it easier to arrange your retirement finances.

You’ll get one payment instead of several and it could lower your overall charges. Yet there are also negatives to consider, such as exit fees and tax implications.

Becky O’Connor, director of public affairs at PensionBee, said: “By seeing the overall value of all their pensions combined, savers can be better placed to assess if they’re on track for the lifestyle they want in retirement, or if they need to increase their contributions.

“However, consolidation might not be the right choice for every saver. If their existing pension offers valuable benefits, these may be costly to give up by transferring out.”

5. Review your investments

Historically as you near retirement, the advice has been to lessen the risk of your pension investments.

This isn’t always the best course of action. Take a 61-year-old, for example, who wants to retire at 66. If they plan to use their entire fund to buy an annuity or withdraw it in cash they should consider reducing their investment risk, according to Laura Suter, director of personal finance at AJ Bell.

“Neglecting to adjust your investment strategy could leave you vulnerable to market volatility, as evidenced by the significant declines in markets during the pandemic,” she warned.

However, for anyone who plans to remain invested and take an income using drawdown, while they should review their investments, this doesn’t necessarily mean drastic changes because they will remain invested for a longer period.

“Instead the process will involve assessing the risk level of your investments, potentially switching some to lower-risk or more diversified options,” Suter said.

“For those planning to stay invested and draw an income, products like a self-invested personal pension (Sipp) offer flexibility, allowing you to choose from thousands of funds, bonds and individual stocks with ease.”

It’s a careful balancing act though, and Henrietta Grimston, financial planning director at Evelyn Partners, warned that there could be a temptation to take too much risk when you have already achieved financial independence, which could “risk the shock of big market corrections which may negatively impact your retirement plans”.

Read more: Our best Sipp providers

6. Contribute more to your pension – it’s really not too late

If your retirement plans aren’t on track, you may need to step up your saving efforts – something that could actually make more sense now if you’ve paid off your mortgage, seen children fly the nest and have more disposable income to put away.

Contributing more can still make a significant difference to your future income.

For example, say you’re a 61-yearold earning £60,000, with a pension pot worth £200,000 in a company pension plan that pays a total contribution of 10 per cent (combining employee contribution, employer contribution and tax relief).

If you keep making the same contributions until the age of 66, you could have a pension worth about £294,000, according to AJ Bell. This would give you:

• £73,500 in tax-free cash
• a £220,500 taxable pot that could deliver about £11,000 a year via drawdown, increasing by 2 per cent a year, for about 25 years

But if you increase your contribution by 8 percentage points – sacrificing £400 from your monthly payslip – for five years until you are 66, this same pot could be worth about £328,000. You’re then talking about:

• £82,000 tax-free cash
• plus a £246,000 taxable pot that could provide an income of about £12,300 a year, also increasing by 2 per cent per year, for about 25 years

What to do three years before retirement

You’re on the home straight. So, what should you be looking at as a life of leisure looms? Ruth Jackson-Kirby lists the best steps.

7. Get a quote for a final salary pension

If you have a defined benefit – or final salary – pension, then it is time to contact your provider to get a quote. The term final salary pension is a bit misleading – you won’t receive your full salary in retirement.

Your pension provider works out your retirement income based on what you were earning when you left the pension scheme (or retired) or your average salary across your career.

This figure is then combined with the number of years you were in the scheme and your company’s accrual rate to give you a figure.

For example, if your final average salary is £60,000, you’ve worked for 25 years and the accrual rate is 1/80th, your annual pension would be 60,000/80 x 25 = £18,750.

These sums mean you can’t simply assume what you’ll get from your final salary pension – you need to contact your provider for a quote.

8. Clear debt

Now is the time to pay down any debt. Spending the next three years paying off personal loans, credit cards and overdrafts will leave you in a much stronger position when you retire. Less of your pension will go on debt repayments so there will be more to spend on better things.

“If you still have an outstanding mortgage, then this could be a good time to pay it off or put a plan in place to make sure you are mortgage free as you enter retirement,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

“Housing costs take a big chunk out of your living expenses and if you can reach retirement without them then that will free up extra income.”

Contact your mortgage provider to find your outstanding balance and a settlement figure. They can also tell you if there are any early repayment charges (ERC) to pay and, if there are, how much you can overpay without triggering them. Most fixed-rate deals come with ERCs but allow you to overpay by 10 per cent a year.

You could pay off what remains in a lump sum, overpay every year or increase your monthly repayments to clear what remains before you retire.

9. Build up emergency savings

While you’re working it’s recommended you have about three to six months’ income in cash savings. Once you’re retired it’s wise to have 18 months to two years worth of living expenses in a cash-based product.

It means that if the markets do experience volatility, you’re not forced to draw from the assets at an unfavourable price and instead can leave the portfolio to recover.

“Fortifying your rainy-day fund ahead of retirement reduces the likelihood of having to disrupt your retirement income strategy – dipping into savings and investments pegged to providing a retirement income – in order to cover emergencies now,” said Myron Jobson, a senior personal finance analyst at Interactive Investor.

10. Take your time to consider whether equity release is a viable option

If you can’t clear your mortgage before retirement then another option is equity release. This is a loan taken against your home, but you don’t make repayments. Instead, the interest rolls up and the whole debt is repaid when you die or you move into care and your home is sold.

“Homeowners have significant sums tied up in their property, often more than in their pensions,” said Stephen Lowe from the retirement specialist Just Group.

“Switching to a lifetime mortgage can help to pay off expensive debts and give people options. A lifetime mortgage won’t suit everybody, but it is a useful tool in some cases.”

You could use a lump-sum lifetime mortgage to clear the remains of your traditional mortgage, so you won’t have to make repayments out of your pension. Or you could get a regular income lifetime mortgage that pays you an agreed income for a fixed period.

The drawback with equity release is it can be expensive. The interest on equity release loans is typically higher than traditional mortgages.

On top of that the interest can balloon because you aren’t making any repayments. This means you could end up wiping out the value of your home. Minimise this risk by shopping around for the lowest interest rate and only borrowing what you absolutely need – you could always borrow again in the future.

What to do one year before retirement

With 12 months to go, things are about to get real. But even at this point, nothing is set in stone. Moira O’Neill looks at the final steps.

11. Review your outgoings – what will change?

Once you retire, your spending patterns will be different from when you were working. You won’t have to travel into the office, so you may well be spending less on transport and buying lunch. But you also may have less income to live on, which will make budgeting essential. It’s best to prepare by planning ahead.

The government educational website Moneyhelper has a free budget planner. You could also use a budgeting app such as Plum, Emma or HyperJar, which link to your bank accounts to help you to categorise and review your spending.

Now can also be a good time to make those boring but easy wins, such as comparing and switching insurance and utility suppliers.

12. Check for benefits and other perks

Along with the state pension, there are a range of benefits and perks that you can claim once you retire – but many people miss out on hundreds of pounds worth of rewards a year.

Several kick in at 60: everyone over this age gets free prescriptions and a free NHS sight test. A senior railcard is also available for discounted train fares. Plus, if you live in London and other cities, you could get free travel on buses and trains in and around the city.

Other benefits, such as a free bus pass, the most well-known of pensioner perks, can be secured when you reach state pension age.

Other benefits may be less obvious. Pension credit, worth £3,900 a year on average, is one of the most underclaimed and little-understood benefits, for example, with about 850,000 pensioner households failing to claim it, according to official statistics. You can claim it even if you own your own home and have some savings and a pension.

Moneyhelper has a benefits calculator to help you to work out what you might be able to claim. You might also qualify for help with council tax and heating costs.

13. Decide on retirement options – include deferring your state pension

Now is the time to make final decisions on options such as buying an annuity, entering drawdown, taking tax-free lump sums and even deferring your state pension.

Firstly, you do not get your state pension automatically when you hit state pension age – you have to claim it. But if you don’t need the money straight away, you could delay your claim.

Your state pension increases by the equivalent of 1 per cent for every nine weeks you delay. For example, if you are due to get the full new state pension of £221.20 a week, then by deferring for 52 weeks, you would get an extra £12.82 a week.

For defined contribution pensions – the type of scheme where the amount you get when you retire depends on how much you save and how much this money grows – there are two ways to take an income and you should understand the pros and cons of each.

The first option is to use the amount in your pension pot to buy an annuity, a form of guaranteed income from an insurance company. The other is to take an income directly from the pension, while keeping your pot invested.

Pension Wise is a service that offers free, impartial guidance to over-50s who have defined contribution pensions. You can book a 60-minute appointment in which an expert will explain your options.

You could also model your retirement income by using a free planning tool such as the one at moneyhelper.org.uk.

Read more: Our best pension drawdown providers

14. Do the maths on part-time working (or get someone else to do it for you)

For many people, retirement is simply a new phase of financial freedom in which they can do voluntary work, go part-time, or set up a business.

Alice Guy, the head of pensions and savings at Interactive Investor, said: “Around a quarter of adults work part-time in their early sixties.

“For many, retirement isn’t a simple cut off point and you may be able to ease into retirement slowly with part-time work to bridge the gap.”

If this is your plan too, take advice on how to draw an income from pensions and other investments in a tax efficient way alongside your continuing earnings.

Also be aware of the money purchase annual allowance (MPAA). The maximum amount that most people can contribute to a pension and get tax relief is £60,000 a year. But if you start to take money from a defined contribution pension, the amount that you can contribute to your defined contribution pensions while still getting tax relief will reduce to £10,000.

For example, if you contributed £17,000 to your defined contribution pension, you would exceed the MPAA by £7,000. You would then have to pay an annual allowance charge on that £7,000, which could be 20 per cent, 40 per cent or 45 per cent, depending on your circumstances.

This new lower limit – the MPAA – was created to stop people trying to avoid tax on earnings or gain tax relief twice by withdrawing their pension savings and then paying them straight back in again.

How I retire: “I’m trying to plug my eight-year savings gap in the run-up to retirement. Here’s how”

Michelle Eshkeri, 54, from London, is focused on boosting her retirement savings to make up for an eight-year period when low earnings prevented her from contributing to a pension. She is
hoping to retire early, at 58.

“In 2020 my husband and I spent £2,000 to work with an independent financial adviser for a short time and she set me up with a Sipp [self-invested pension plan] and also a stocks-and-shares Isa. It certainly gave me some insights and galvanised me to do the saving,” she said.

Having increased her earnings after setting up her own company, letmewrite.co.uk, which offers content and copy services to other small businesses, she immediately started paying £500 a month into the Sipp — although she has since switched to paying in a lump sum halfway through the tax year.

“I also add more whenever I can. For example, last year I sold some shares from an old employer in a tax-efficient way – I ensured that the capital gain was just under the then-£6,000 limit – and I put most of the £35,000 proceeds straight into my Sipp.”

She also has a final salary pension after working as an accountant for 20 years and she will qualify for a full state pension.

Other money resolutions she uses to boost her overall finances include always using cashback, shopping around whenever her insurance policies are up for renewal and buying pre-packed meal kits to reduce food waste and grocery bills.

“If you don’t do these things you are leaving money on the table,” she said.