3 reasons why you need a financial plan if you want to retire in the next five years


Throughout your working life, you’ve probably been reliably saving into your pension pot even though the prospect of retirement seemed very distant.

If you’re beginning to approach that milestone, you may be already mentally preparing yourself for the significant change that it will make to your life. But if you want to enjoy a comfortable and sustainable retirement, it’s important to retire in the right way.

Here are three reasons why you’ll need a financial plan if you want to retire in the next five years.

1. You need to know what you want from your retirement

When you consider your retirement, it’s important to know what you want to do with your time once you’ve stopped working. This is because your plans will have a significant influence on how much money you’ll need to support your chosen lifestyle.

If you’re approaching retirement, now is a good time to reflect on what you want out of it. This may involve anything from travelling the world, mastering your hobbies, or even just spending more time with your loved ones.

Your retirement represents the culmination of decades of hard work so it’s important that you spend it in a way that makes you happy. While your plans don’t have to be set in stone, it’s important to get an idea of what your priorities are.

Importantly, thinking about your desired lifestyle can help you to understand how much you would need to afford your preferred lifestyle.

According to research by consumer advice group Which?, the average retired household spent around £25,000 in 2020. This covered all basic areas of expenditure as well as some luxuries, such as hobbies, eating out, and international holidays.

The study also found that to afford a luxurious lifestyle, which includes long-haul trips and new cars, you would need £40,000 per year.

Whatever you want to do in retirement, it’s important to make a plan so that you can estimate how much you’ll need to support your desired lifestyle.

2. You need to know what assets you have

Once you have an idea of how much money you will need to fund your desired retirement, the next step is to get an accurate picture of what assets you hold.

It’s important to bear in mind that your income in retirement won’t just be made up of the pension schemes you have in place. According to data from the Department for Work and Pensions, only around 70% of a retired couple’s income in retirement came from their pensions.

Source: Department of Work and Pensions

While you may have a considerable private pension, your State Pension is likely to be the bedrock of your income in retirement. That’s why it’s important to make sure that you’re eligible for the full amount.

For the full State Pension of £9,339 (in the 21/22 tax year) you will need 35 qualifying years of National Insurance contributions. You can check your State Pension forecast on the government website to find out how much you are eligible for and whether you can increase this amount.

You can also request a forecast for any other pensions you may hold, such as a workplace pension. This can help to give you an idea of how much you can expect to receive in retirement.

If you think you may have a workplace pension that you have lost track of over the years, you can use the government’s free Pension Tracing Service to find it.

Furthermore, it’s important to get an idea of how much you may be able to expect from other sources of income, such as investments or buy-to-let properties.

3. You can make up any shortfall

If you want to ensure that you have enough assets to give you a comfortable and sustainable retirement, making a plan is essential. If you crunch the numbers and find out that you don’t have enough wealth to support your desired lifestyle throughout retirement, you need to remedy this.

One of the benefits of doing this in the run-up to retirement, rather than once you have already retired, is that you have the time to make up a shortfall before it impacts your lifestyle.

If you’re approaching retirement and are concerned about a shortfall, it’s important to maximise your savings.

Boosting your pension contributions can be a good way of increasing your savings. As a basic-rate taxpayer, every £100 contribution to your pension only costs you £80. If you’re a higher- or additional-rate taxpayer, you can benefit from even greater tax relief.

If you’ve maximised your pension savings but want to put aside more money for retirement, one potential alternative is to save into an ISA. Since you don’t have to pay Income Tax or Capital Gains Tax on any returns from an ISA, this can be a tax-efficient way to have an extra source of income when you retire.

If you do choose to save in this way, your ISA Allowance allows you to contribute up to £20,000 in a tax year.

To ensure that you save in the most effective way for retirement, you may benefit from seeking professional advice. A financial adviser can help you to navigate any tax pitfalls and maximise your allowances to build your pension in a tax-efficient way.

Get in touch

If you want help planning for your retirement, we can help. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note:

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.