5 money mistakes people make in their 60s

Many people will move from full-time work to retirement at some point in their 60s, although this process often happens gradually over a number of years. As a result, some of the biggest money mistakes people make in this decade are around managing this transition — be it a failure to plan in advance, taking too much too soon from their savings, or not finding the most efficient way to turn accumulated retirement funds into a day-to-day income stream.

Here are five financial traps people fall into in their 60s, with suggestions on how to avoid them — helping to boost your finances, not only during this key decade, but for many years beyond.

1. Splurging tax-free cash on holidays and home improvements

After a lifetime of work and sensible pension saving, the option to take a quarter of these funds as a tax-free lump sum can seem like a well-deserved bonus.

Many take this tax-free cash on retirement — though some will grab this lump sum even earlier, with pension freedom rules allowing access to pensions from the age of 55 (57 from 2028).

Pensions are designed to provide a retirement income once you stop working, but many people don’t think about this tax-free cash in the same light. Perhaps it is the ‘tax-free’ label that encourages people to spend, spend, spend. Research suggests only one in four pension savers intend to use their tax-free cash for retirement income¹, with home improvements, holidays, and buying a new car among the most common ways that people use this money². What’s more, this money is often spent quickly, with around a third of this tax-free cash gone within six months of people taking this benefit³.

But you can only spend pension savings once, and depleting up to a quarter of your retirement fund right at the start of retirement can seriously impact your finances over the longer term. You don’t lose this tax-free benefit by keeping these funds invested until you need them. In fact, this could be beneficial if funds stay invested for the longer term in higher-risk growth assets (such as equities), rather than being deposited in a current or savings account, where they may be earning just a negligible rate of interest.

Taking too much too soon doesn’t just apply to the tax-free cash element of your pension. Evidence suggests many people are making the most of the pension freedom rules. Recent government figures show seven out of 10 people have taken a flexible payment from their pension before their 65th birthday⁴ — and this does not include those taking just the tax-free cash.

There may be perfectly good reasons to spend some of your pension savings, but make sure this is not at the expense of longer-term financial security, as that holiday of a lifetime may cost a lot more than you planned.

2. Not being mortgage free by the time you retire

Most people don’t want to go into retirement with significant debts, including a large mortgage. But with rampant house price inflation over recent decades, many have entered their 60s with bigger home loans than previous generations, in some cases taking advantage of the lower interest rate environment to remortgage property to help children onto the housing ladder or fund home improvements.

But it can make sense to prioritise debt repayment in the last few years of your working life, particularly with interest rates and mortgage rates now at a higher level.

Those going into retirement with mortgage debt may find their remortgaging options far more limited at the end of a fixed-rate term, due to their age, with few banks willing to lend to borrowers once they stop working. This can leave homeowners on expensive SVRs (standard variable rates) which may be more difficult to fund from pension income.

In some cases, you may want to consider using pension funds to repay debts, but this will depend on circumstances. Seek advice on these options where appropriate.

3. Underestimating day-to-day living costs — and how long you’ll pay them for

One of the biggest mistakes people make is failing to budget properly for retirement. It helps to know exactly what your various pensions, investments and other savings are worth. This includes knowing what you will get from the State Pension and when it will be paid.

On the other side of the budgeting spreadsheet is calculating how much you’re likely to spend each year. Analysing current spending trends is a good start, although patterns will change once you stop working. If the mortgage is paid off this can be a sizeable saving, alongside commuting costs. But the typical nine-to-five doesn’t just put money in our pocket, it can stop us spending too much during working hours. Expenditure can go up when you have days to fill, whether its membership of a local sports club, meals out, extra holidays each year, or even higher heating bills from staying at home. The Pensions and Lifetime Savings Association (PLSA) estimates that a single person currently needs around £31,000 a year for a ‘moderate’ living standard in retirement, and £43,000 to ensure a ‘comfortable’ lifestyle⁵.

Many people underestimate how much they’ll spend each year, but also, more critically, how long they need these retirement funds to last. A 65-year-old man can currently expect to live for another 18.5 years, while a woman of the same age can expect to live for a further 21 years⁶. These are average life expectancies — ONS data suggests one in four women will live to 94, and one in 10 to 98. (For men the same proportion will live to 94 and 96 respectively)⁷.

It can be daunting, and perhaps a little disheartening, working out if you’ve saved enough to ensure a reasonable standard of living throughout your retirement. But those that fail to budget risk running into financial difficulties later on.

If a potential shortfall is identified it is possible to address this issue, even in your 60s, by either saving more, working for longer or delaying taking pension benefits. Not spending the tax-free cash in the first six months (see above), for example, could make a significant difference.

Given most people underestimate their longevity, it is also worth thinking about how your pension or other savings are invested. At 65, you are likely to be looking at an average 20-year investment horizon, so you don’t necessarily want all your assets in ‘safer’ cash or gilts as these are unlikely to keep pace with inflation over longer periods of time. Keeping some of your savings invested in growth investments — such as funds that invest in company shares — can help your finances keep pace with inflation.

4. Paying more tax than you need in retirement

Many people retire with a hotchpotch of pension plans, ISAs, and other savings plans. But it pays to think about which to spend first in retirement, particularly in relation to tax. You can take a quarter of your pension tax-free, but money withdrawn after this is taxable at your marginal rate. The state pension is currently worth around £11,500 a year, just below the personal allowance. So private or occupational pensions that push you above this £12,570⁸ limit will be taxed.

If your combined income exceeds £50,000⁹, then you will pay 40% tax on funds taken from a pension above this limit. Some people taking a large lump sum from their pension in one go can be caught by these higher tax bands, whereas spreading these withdrawals over two (or more) tax years might mean less of your pension is paid to the taxman, which means it may last longer.

It’s worth remembering that there is no tax to pay at all on money taken from ISA savings, regardless of other income.

There may also be inheritance tax (IHT) considerations. Usually, pensions are exempt from potential IHT charges. No such exemption applies to ISAs, or other general savings and investment plans. This may influence which savings you use first, if the total value of your assets is likely to exceed £325,000 on death. If IHT is a concern seek specialist tax advice. If you have a number of different pension and ISA plans, you may want to look at consolidation options prior to retirement.

5. Not seeking help with retirement planning

There’s no doubt there are a raft of complex financial decisions to be made as people approach retirement and move into retirement. Knowing what to do for the best isn’t always easy, as there is no simple ‘right’ or ‘wrong’ checklist — much depends on your own individual circumstances. With this in mind, it can help to talk things through, not just with family members but an informed money expert.

Some people choose to pay for financial advice, although this is likely to be more cost-effective for those with larger savings pots. But regardless of the size of your pension, everyone aged 50 or over is entitled to a free review session with the government’s Pension Wise service to talk through their options.

Most pension experts recommend booking such a session before taking pension benefits — be it your tax-free cash, or regular payments. Evidence suggests relatively few people are taking up this option though, with just a third of people accessing their pension in the past few years booking a Pension Wise appointment¹⁰ — despite the fact that nine out of 10 of those who’ve used this service say they felt more informed about their pension options as a result¹¹.

Source:

¹ LGIM, Like it or lump it: Retiree attitudes to tax-free cash, 2021
² Actuarial Post: What people have spent their pension cash lump sum on, 2024
³ Standard Life, 26 July 2023
⁴ Financial Reporter, 2 August 2024
⁵ Retirement Living Standards, August 2024
⁶ Age UK, The State of Health and Care of Older People, 2023
⁷ ONS, life expectancy calculator, January 2022
^8,9 Income Tax rates and Personal Allowances, Gov.uk, August 2024
^10,11 Money & Pensions Service, 1 September 2023

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 an ISA or SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally 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.