With many people not saving enough, it’s crucial to plan carefully, from understanding tax implications to investing strategically
Retirement is a milestone many look forward to, a chance to step away from work and enjoy years of freedom.
But for many, the reality falls short of expectations, with savings, pensions, and projected income often insufficient to maintain the lifestyle they had envisioned.
With growing life expectancy and changing pension rules, planning ahead is essential to avoid shortfalls.
Here, The i Paper speaks to the experts about the steps you should take before retirement to secure your financial future.
Assess your income needs
Understanding how much money you will need is the first step in planning for retirement.
Many workers underestimate the costs they will face, not just essentials like housing, food, and utilities, but also holidays, hobbies, and other lifestyle choices that can add up over the years.
Without a clear picture of income and expenditure, it is easy to assume pensions will cover everything, only to find a shortfall later.
John Chadwick, managing director of Planned Future, recommends a budgeting plan that separates essential and discretionary expenditure.
Tools such as moneyhelper.org.uk can help map costs clearly.
Work out how much money you have – and how to take it
Once spending needs are clear, retirees should assess all income sources, including state and workplace pensions, property equity, tax-free ISAs and general investment accounts.
Chadwick explained that retirees need to know how their specific pensions work, and how they will receive income from them. Defined benefit (DB) schemes offer guaranteed payouts every year, like a workplace income.
Defined contribution (DC) pensions provide a pot of money, but there are multiple ways to take that money. An annuity – which functions like a DB pension – can be bought, or a retiree can access their income via drawdown, where they pull money from their pot while keeping the remainder invested.
With drawdown, “you need to be careful that you don’t run out of money too soon”, Chadwick warned.
A rule-of-thumb “safe withdrawal” amount is 4 per cent of the pot.
State pensions currently provide £230.25 per week from those 66 years old for those with 35 qualifying years of national insurance contributions or credits. The state pension age is set to rise to 67 in the coming years, however.
You can check how much money you will get using the Government forecast tool and you can buy extra pension if you are not on course to receive the full amount.
Start saving early and plan ahead
Starting to save as early as possible is one of the most effective ways to ensure a comfortable retirement.
Personal and workplace pensions, including additional voluntary contributions, benefit from tax relief at your marginal rate, making them worthwhile as a savings vehicle.
If you’re employed, your employer will have to contribute 3 per cent of your qualifying earnings into a pension if you contribute 5 per cent, but some employers will provide more in certain circumstances, for example if you opt to pay in more.
Maximising employer contributions and making your own regular contributions can significantly increase your pension pot over time.
Managing debt and keeping an emergency fund is also crucial.
James Eley, marketing manager at LifeCare Residences, a retirement village provider, said: “Financial debt, such as credit card balances or personal loans, is one of the biggest obstacles to a secure retirement.”
Paying off debt before retiring ensures more of your income goes toward the lifestyle you want.
Downsizing your home just before retirement can also free up cash and lead to lower ongoing costs.
Track down lost pensions
Many people risk retiring without enough savings. According to research from BlackRock, 43 per cent of working-age adults are under-saving, and Scottish Widows estimates 15.3 million face a retirement shortfall.
Susan Hope, retirement expert at Scottish Widows, said: “There is a widening gap between the life people want and the reality they’ll face.”
She advised tracking down any lost pensions as one way to close the gap.
There are several tools online that can be used to find these, including the Government’s own tool.
Investment planning and diversification
As well as paying more money into your pension, ensuring the money itself is working as hard as possible is also key.
Sam Ratnage, senior wealth manager at Tideway Wealth, a wealth management firm, recommended investing strategically to earn a higher return than cash deposits alone.
If you have a workplace pension, the money will be invested in a default fund, but you can change this if you would rather go for a different option.
Certain investment options will be riskier – such as those with higher proportion of equities in companies – but they may lead to higher returns.
If you are unsure, you should seek financial advice before making a decision.
Factor in tax and life events
It is important to remember that accessing pensions has tax implications.
Up to 25 per cent of your pension – to a maximum of £268,275 – can usually be taken tax-free from your pot, though the rest will be subject to income tax as regular income would.
Life events – including supporting family, travel, or property purchases – should be also be considered when pension planning.