Retirement planning: preparing for retirement checklist

You’ll probably need to get used to a different pattern of income and spending when you retire. This is because you’re likely to have less money to live on.

To prepare yourself for these changes, and to help you plan ahead, it’s a good idea to make a budget. When making a budget for retirement it can help to break down your potential future spending into two categories:

• Essential expenditure – this is money you need to cover your basic living needs, such as heating and eating. It’s likely to include things like housing costs, utility bills, groceries and day-to-day travel.
• Non-essential or ‘discretionary’ income – this is money for the things you like to do day-to-day and beyond. It would typically include things like eating out, holidays and leisure.

With a good idea of your spending needs in retirement, you’ll be able to work out the income you’re likely to have to spend.

It’s now time to work out how much you’re likely to have in retirement. It’s a good idea to do this about two years before you retire.

This involves the following:

1. Getting a State Pension statement. If you haven’t recently had a State Pension statement, it’s a good idea to get one. This will give you an estimate of how much State Pension you might get. This is based on your National Insurance contributions so far. You can check your forecast on the GOV.UK website
2. Finding out how much you might get from any defined benefit pension (if you have this kind of pension). Ask your pension provider for a retirement quote.
3. Finding out how much you have in your defined contribution pension pot. You should be sent a statement annually showing how much is in your pot. Ask your provider for information on your retirement options.
4. Adding up the savings and investments you could use for your retirement. A pension is a good way to save for your retirement. But you might also have other savings or investments you could use to boost your income when you retire.
5. Tracing any lost pensions. If you’ve lost track of any old pensions, the government run a free service to trace them. Find out more on the Pension Tracing Service website

Depending on the type of pensions you have, you might need to decide how to take your money.

If you have a defined benefit pension, it will typically begin paying you a guaranteed income from your normal retirement age under the scheme. This will often be age 60 or 65, but check with your scheme.

The amount you get will depend on your salary and how long you worked for your company.

A lump sum might be paid as well as your pension, or you might have to give up some income to take a lump sum.

If you have a defined contribution pension, you’ll have built up a pot of money which you can normally begin taking from age 55.

There are several ways you can use the money in your pension to provide you with income or lump sums in retirement. Different options can provide different amounts of income.

When you’re considering the different options available, it can help to think back to your income needs.

For example, it generally makes sense to try to make sure all your essential income needs are covered by guaranteed income. This could include income from your State Pension, a defined benefit pension or an annuity.

You might also have other sources of income you can use in retirement, aside from your pensions. This income is likely to vary over time and might not be guaranteed for life.

This income could come from:

• part-time work
• pension pot you’ve invested and can draw a flexible income or lump sums from
• savings and investments – the amount of interest or income you earn is likely to vary depending on interest rates and the performance of your investments
• Property – this could be rental income from any property you own. Or you might plan to sell the property and raise money to supplement your income
• Your home – you might rent out a room to a lodger, plan to downsize and use any money raised to supplement your income, or sell some of the equity in your home in return for a lump sum or income.

When you’ve worked out how much money you’ll need, and the sources of income you’ll have in retirement, you’ll have a clearer idea of when you can afford to retire.

Now you know:

• how much income you might need in retirement and have noted down how much you might get from your different pensions, and
• when they might begin paying you an income and/or a lump sum.

You can look to make a plan for your retirement. Here are some things to consider when making a plan.

You don’t have to stop working to take your pension. But, usually, you must be aged at least 55. You might be able to take it earlier if you’re in poor health.

If it’s a defined contribution pension, you normally have a lot of flexibility over when you begin taking money. But that isn’t always the case, so it’s best to check with your pension provider. It’s also worth checking if there would be any extra charges you need to be aware if you delay taking money.

If it’s a defined benefit pension, the scheme usually sets a normal retirement date – from when you’ll be able to take an income.

It’s sometimes possible to take it earlier or later than this. Although if you take it earlier, you might get a reduced income, as it will be paid for longer. Check the options with your scheme administrator

The income you have available to spend might be lower than the amount you receive due to the tax you might have to pay on it.

For help working out how much tax you might have to pay, read our guide on tax when you’ve retired.

If you do appear to have gaps, you might need to consider changing your plans. For example, working for longer, saving more or potentially taking some money from one or a number of your pensions earlier.

You do need to keep in mind how long you might need the income for, which could be 20 years or more. If you use too much of your money early on in your retirement, you might not have enough later on in life.

You can start taking your State Pension when you reach State Pension age but you can’t take it sooner.

You can delay taking your State Pension and get a higher amount when you do start.

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 have a defined benefit pension – you might need to give up pension to take a lump-sum payment. Make sure you check this is the best value option for you.

If you’re not sure, you might want to get help and guidance from us or get regulated financial advice.

Are you nearing retirement and the amount you’re likely to retire on is less than you’d hoped? There are still things you can do to before you retire.

Two ways of increasing your pension pot are to:

• pay more into it, and
• put back the date you start taking money from it.

This allows you to increase the amount you’ll have to retire on and reduce the amount needed due to having a shorter overall retirement.

You can also check for gaps in your State Pension and make voluntary contributions to help fill them.

You could also consider using releasing money (equity) from your house to increase your income. This means you receive a loan now, which gets paid off later when your home is sold if you move in with relatives or into care, or on your death.

A less far-reaching way of generating an income from your home is to take in a lodger if you have the space.

Under the government’s Rent a Room scheme, no tax is charged on the first £7,500 a year you earn from a lodger.

You might also be entitled to some additional State benefits when you retire, or your existing benefits might be affected.