The countdown is on if you are planning to retire in five years’ time. At this stage, stopping work is not just a distant, hopeful aim but a more tangible goal, and this should be reflected in the financial decisions you make.
As you approach retirement, the focus needs to be on protecting the savings you’ve built to date, thinking more seriously about how you might take your pension benefits, while squirrelling away what you can in this final furlong before retirement.
Your adviser will help you navigate the various considerations during this period; however, the checklist below offers useful pointers regarding some of the key steps.
Make the most of tax-efficient pensions and ISA savings while you are still earning. Most people can save up to £60,000 tax free into a pension each year, or the equivalent of their annual salary if this is lower. In addition, everyone can save up to £20,000 each tax year into an ISA.
For those who have the funds available and want to maximise pension savings, they can also ‘carry forward’ unused pension allowances from the last three years.
Tax relief makes pension contributions particularly cost-effective for higher-rate or additional-rate taxpayers, especially if they’re likely to move to a lower tax bracket in retirement. If you are a member of a workplace pension, you will also benefit from employer contributions.
There are some restrictions related to pension contributions, which do not affect ISA allowances, so higher earners should ensure they also make the most of these wrappers.
Start thinking about how you will take an income from pensions and investments in retirement. Will you use your pension to buy an annuity, keep funds invested and draw an income from it, or simply take out cash lump sums? There is no right or wrong answer – much will depend on your financial circumstances.
Remember, it is possible to take a mix-and-match approach when it comes to annuities and drawdown.
You don’t need a definitive answer at present, but it pays to explore the options in advance and weigh up the pros and cons of each. Deciding which is the most likely course of action may influence your investment strategy for the next five years. Don’t forget to include the State Pension when calculating the income you’ll need to cover day-to-day spending.
If you are five years from retirement, you don’t want a stock market crash to derail your plans. However, switching all your savings into low-risk cash holdings will simply mean your retirement funds are unlikely to keep pace with inflation.
Most people want to steer a path between these two extremes, which means holding a diversified mix of assets, including equities, bonds, and cash. Think about your own circumstances and how your future plans could impact your investment strategy.
Making the wrong decision at retirement can land you with an unexpected tax bill, potentially wiping out some of the investment gains you’ve made on your pensions and investments.
When looking at income options at retirement, it is important to understand your tax position and the most efficient way to convert your savings into a regular income. This should be an important element when considering different income options.
Most people can withdraw up to 25% from their pension tax-free, but further payments taken from a pension may be subject to income tax.
It’s important not to look at pension savings in isolation. Remember, there is no income tax due on funds cashed in from ISAs, so taking money from these savings can be a useful way to top up state or private pensions without pushing your income into a higher tax band.
Tax rules can be complex and subject to change. Your adviser will be able to help plot the right course for your individual circumstances. When approaching retirement, it is important to review your plans regularly to ensure they remain on track and adjust where necessary. For example, if investment returns are not what you had hoped for, you may need to save more or push back your retirement date.
Try to be flexible, as circumstances can change and impact your plans. Reviewing your investments and retirement plans annually together with your adviser will help ensure you stay on track to achieve the retirement you’ve dreamt of.
Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. The value of investments can go down as well as up, so you may get back less than you invest. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment, you should speak to your financial adviser.
Author: Fidelity
Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0325/400171/SSO/NA
This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth. The information contained in this blog post is based on 2plan wealth management Ltd’s current understanding of tax laws as at April 2025. These laws are subject to change at any time and 2plan wealth management Ltd cannot be held responsible for any decisions made as a result of this newsletter. Tax advice is not regulated by the Financial Conduct Authority
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