Retirement plan checklist: 5 years from retirement

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 needs to 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. It is good to retain a degree of flexibility, though, as this gives you the option to change your planned retirement date should circumstances change.

The checklist below offers some useful pointers on key steps you might want to consider in this five-year run-up to retirement.

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Maximise your savings

Make the most of tax-efficient pensions and ISA savings while you are still earning. Most people can save up to £60,000 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, there’s the opportunity to ‘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. Don’t forget that if you are a member of a workplace pension, you will also benefit from employer contributions into this scheme.

However, the ability to boost pension payments is more limited for those earning more than £200,000, as a taper reduces their annual allowance.

Similarly, those who have already taken benefits from their pension plan will have a reduced Money Purchase Annual Allowance (MPAA), which restricts annual contributions to £10,000. This doesn’t apply to those who have only taken their tax-free cash from their pension.

These restrictions do not affect ISA allowances, so higher earners should ensure they make the most of these wrappers.

• Learn more about ISAs
• Learn more about SIPPs

Explore income options

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.

• Read: Triple Lock: what will the State Pension be in the future?

Reassess your investment strategy

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—if you are looking to buy an annuity at retirement, you don’t want to be overexposed to the stock market prior to this. However, if you are planning to keep pensions and ISAs invested beyond retirement through a drawdown option, you may be looking at a 10-year-plus investment time frame, so you may be more comfortable with higher-risk equities to maximise longer-term growth potential.

Understand your tax position

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, so it may help to seek specialist advice on this issue in advance of retirement, particularly if you have more substantial savings and investments.

Test your retirement plan!

In this rundown to retirement, it is important to review your retirement plan regularly to ensure it remains on track. This will allow you to adjust plans where needed without necessarily derailing the overall timetable. For example, if investment returns are not what you had hoped for, you may need to save more or push back your retirement date. Alternatively, more significant changes—be it ill health, redundancy, or divorce—may require a more radical rethink.

Consolidating existing pensions and ISAs can make it simpler to see if your retirement plan is on track. Fidelity offers a number of tools, such as its Retirement Planning Calculators, to help set and keep track of retirement goals.

Be prepared to be flexible, particularly if circumstances change. This could be a change in your personal situation, an adjustment in financial markets, or a shift in government policy that affects pension rules. Checking your investments and retirement plans annually will help ensure you stay on track.

Book a pension wise appointment

As you approach retirement, it’s a good idea to take advantage of Pension Wise, the government-backed guidance service. This free and impartial advice can help you understand your options, make informed decisions and avoid costly mistakes. Booking an appointment well in advance will give you time to consider your choices and refine your retirement strategy accordingly. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

• Read: I changed my plans after trying this pension calculator
• Read: How to trace old pensions
• Read: Retirement plan checklist: 10 years from retirement

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. 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 one of Fidelity’s advisers or an authorised financial adviser of your choice.